June 2024 – Warren's space

Econ 101: Trade balance

Everyone understands that we are each wealthier if we buy most of what we consume from others and pay for it with what we specialize in producing ourselves. But at dinner last night one of our guests (Chatham House Rules prevent me from revealing his identity) asked how we can compete with China when their workers are so cheap? The teacher in me rises up to unpack this statement and the related issue of trade balance. It is both complicated and simple.

Are Chinese goods cheaper? Chinese workers are paid in their currency (RMB) and American’s buy China’s output in our currency (USD). If an LED light bulb made in China is sold for 140 RMB is that cheap for American’s? If the exchange rate of RMB for USD is 4 RMB per USD it will cost us $35 per bulb (expensive), but if the exchange rate is 10 RMB per USD it will cost us $14 per bulb (cheap).
So will we buy everything from China? What will the Chinese do with the dollars they receive from exporting to us? They might buy goods from the US (made by workers who used to make LED light bulbs). If the exchange rate is “right”, the Chinese will spend all of those export dollars on imported US products. Trade (imports and exports) will balance. An exchange rate that makes dollars more expensive in China (RMB cheaper in the US) will decrease China’s imports from the US relative to its exports (a Chinese trade surplus). What will they do with the remaining dollars held in China?
What happens with Chinese trade surplus holding of USD? The Chinese can invest them in the US (buy US Treasury securities, stocks, property, etc.). Or sell them for their own currency driving the exchange rate of RMB for USD down (or up depending on what you put in the denominator). The reduced cost in China of US goods will increase Chinese imports and the higher cost of Chinese good in the US will reduce US imports from China. The Chinese trade surplus (US trade deficit) will vanish (or adjust to the rate of capital flow desired by cross border investors). The incomes of Chinese and American workers will be higher because each will be producing the goods for which they each have a comparative advantage (the win-win of free trade).
Exchange rate manipulation or production subsidies distort the outcome. EU tariffs on Chinese EVs are explicitly set at a level to compensate for Chinese government subsidies of EVs. This is allowed by WTO trade rules to put Chinese and German car manufacturers on a fair, competitive basis. The US’s much higher tariff on Chinese EVs makes no mention of complying with WTO rules (the US again does whatever it wants to the detriment of the global trading system).
Trade balance between US and China is used as a simplification. What matters is the balance between each country and the rest of the world but distilling the world into two countries simplifies the discussion.
Time for the dessert.

The Right to Choose

I have always supported a woman’s right to choose whether to complete a pregnancy up to the point at which another person (her fetus) acquires existence and thus the protection of the law. In my view a fetus becomes a person when viable, i.e. when they are able to live outside the womb. In my opinion, laws that permit abortions that comply with that standard, should not force those who disagree to pay for such abortions. Thus I do not support allowing the Armed services to pay for its member’s wanting an abortion for the travel and related expenses of the abortion. Tax payers should not be forced to pay for such individual choices.

A similar argument has been made about taxpayer funding of elementary education. A Jewish taxpayer should not have to pay for a catholic child’s education in a catholic school or visa versa. But I also favor school choice. How do I defend this use of taxpayer’s money? An abortion up to the allowed age of the fetus is an individual choice. But elementary education is required for all children in the public interest. Thus, it is appropriate that the government (taxpayers) pay for it. But, providing public (i.e. taxpayer’s) money for each child’s education can and should leave the choice of school to each parent. It is appropriate that schools eligible to receive public funds meet minimum standards of curriculum to be covered. School choice not only maximizes the freedom of choice among parents with different religious beliefs and views on the most effect approach to education, but the competition among schools improves the over quality of education. https://wcoats.blog/2021/05/09/the-great-divide-who-decides/

Russia

Russia has become a pain in the ass. Why and what should we do about it? First we must realize and accept that Russia will always be here. Just as Nazi Germany’s Holocaust did not eliminate Jews and Israel’s effort to eliminate Palestinians (sufficiently to have a democratic Jewish Israel from the River to the Sea as stated in Zionist documents) will not succeed, it is not possible, nor would the world accept the morality of eliminating Russia.

So the goal must be to carrot and stick Russia into a neighbor we can live with—even productively and happily live with. Our approach to Ukraine provides many lessons for what not to do. With the collapse of the USSR, Russia and the other former Soviet Republics passionately wanted to become part of Western “normal” world. It was great fun working with them toward that goal in the early 1990s.

Russia’s great cultural offerings were more open to us. Russia was added to the G7, which became the G8. Russians are a proud people, who had just been humiliated, and wanted respect. But our embraces were more stumbling than they should have been. After reassuring Russia that NATO would not expand one inch East in exchange for the reunification of Germany as a NATO. We lied. NATOs membership doubled from 16 to 32.

Russia swallowed hard and offered conditions for Ukrainian neutrality that were larging acceptable to Ukraine and in any event negotiable. But we didn’t support/encourage Ukraine to negotiate so Russia invaded it. Even two months later when Russia and Ukraine had virtually agreed on the terms for ending the war, we discouraged it. Two and a half years later 100,000 have been confirmed dead. About 60% of the total were Russian. Twice that many are estimated to have died. And damage to Ukrainian cities and country side will take trillions of dollars to repair. https://wcoats.blog/2022/05/15/ukraines-and-russias-war%ef%bf%bc/

A May 24 report from Reuters, stated that Putin himself “is ready to halt the war in Ukraine with a negotiated ceasefire that recognizes the current battlefield lines.” We seem to prefer that “they” continue fighting to the last Ukrainian. After all we have been able to test our military equipment in the field without the loss of American lives. But we must remember the lessons of the Holocaust and Gaza. We can’t wipe Russia off the map. They will be here five, ten, twenty years from now. What do we want our relationship with Russia to be then? What carrots and sticks will get us there?