Competition, Trade, Currencies, and Economic Summits

November 14, 2010 at 1:52 pm | Posted in International Relations, Outsourcing, Political Economy, Production, World Politics | Leave a comment
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Far more fundamental that the charges and counter-charges of currency manipulation and trade imbalances traded at the November 2010 G-20 summit in Seoul to a shift in the terms of global economic competition was an announcement that the Commercial Aircraft Corporation of China, or Comac, plans the introduction of a 156-seat single-aisle passenger jetliner. The entry of China into the commercial passenger aircraft industry is noteworthy for two reasons.

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First, most of the technology for the Chinese C919 plane will be provided by Western companies. The plane’s computer system, brakes, wheels, and power units by Honeywell; its navigation systems by Rockwell Collins; avionics by GE Aviation; fuel and hydraulics by Eaton Corporation; and flight controls by Parker Aerospace. These companies have agreed to a Chinese stipulation that they set up joint ventures with Chinese companies. Though the companies claim that they will safeguard their intellectual property, David Pierson suggests that the example of high-spreed rail proves otherwise. After European and Japanese firms shared their technology with their Chinese joint venture partners, they are now in direct competition with their former Chinese partners both in and out of China.

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Yet, projections of China’s rapid rise compels there Western aviation companies to bid aggressively for the Chinese market. In the next twenty years, Chinese air traffic is expected to grow at an annual average rate of 8 per cent a year and to meet this demand the country’s domestic airlines are estimated to purchase some 4,330 planes worth $480 billion over the same period. No supplier of aviation parts wants to miss out on this lucrative market.

If the sheer size of its market confers a competitive advantage on China in technology transfer, it is also the case that 55% of Chinas exports are accounted by foreign-owned companies. Moreover, China’s large current account surpluses with the United States and the European Union is matched by large deficits with other countries as shown by a recent article in the Financial Times. In many cases, transnational production and procurement networks span across national  borders to take advantage of wage and cost differentials and a substantial part of China’s exports are only assembled and packaged there from components made elsewhere. This means that these foreign-owned companies are not particularly receptive to calls for China to revalue its currency–or indeed, the attempt by the US Federal Reserve to force down the value of the greenback by releasing $600 billion to buy US Treasury bonds: what a former Chairman of the Fed, Alan Greenspan termed “a policy of currency weakening.”

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Devaluing the dollar by releasing more greenbacks is “clueless” as the German Finance Minister Wolfgang Schäuble called it because it would raise the cost of living in the United States when the unemployment rate is hovering at double digits and is unlikely to create a spurt in job growth in the United States. In fact, though President Obama trumpeted that his visit to India would create 54,000 jobs in the US, that is merely a third of the jobs created in the country in just the last month as Alan Beattie noted in the Financial Times.

In part, trade imbalances have taken center-stage because during the financial meltdown in 2008 and 2009, trade contracted sharply and thereby reduced trade imbalances as Floyd Norris noted in the New York Times. A modest recovery however highlighted the imbalances and governments began to accuse each other of undervaluing currencies.

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Such charges and counter-charges ignore the changes in competitive pressures. With the greater deployment of automated technologies and numerically-controlled machines, and the Taylorization of even skilled work, wage charts increasing resemble a time-glass: fewer and fewer extraordinarily well-paying jobs, and more and more sub-subsistence jobs as indicated in several prior posts. These underlying conditions can be addressed only in the long-run through well developed plans that do not respect two-year electoral cycles which is the focus  not only of Washington politicians but also of the US punditocracy!

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The one remaining competitive advantage the United States has is that its currency is the only reserve currency but if the Fed devalues the dollar–and already uncertainties in currency markets has led to the price of gold soaring to $1,400 a troy ounce–as Robert Zoellich, the President of the World Bank, has suggested it is likely to lead to multiple reserve currencies. And that will seal the end of the United States as an economic superpower.

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