Tag Archives: International Trade

More on the positives of the European Crisis

Via Mark Thoma, a more well written thorough (fact backed) perspective on the net positives for the European crisis: here.

Bottom Line:  The European crisis, by keeping US interest rates in check and oil prices low, may do more to help the US recovery than hurt it.  In the process, however, we would expect the flip side of the resulting capital inflows into the US to emerge – namely, a rising external imbalance.  Arguably, this simply shifts the ultimate adjustment to sometime in the future.  Again.

Same ideas, but I published first!

Advertisements

Seeing the Positives from the European Debacle

What happened in the stock market two weeks ago was scary: the Dow dropped 1,000 points in a matter of minutes.  Greece was on the brink of defaulting on it’s debt; a country I might add, that has it’s currency denominated in Euros.   Investors were worried that if Greece went down, it might drag down the Euro with it.  Luckily, the EU finally pushed politics aside and realized that in order to keep the EU from causing a European Lehman chain reaction, they had to bail out Greece.  If Greece went, so the saying goes, the rest of Portugal, Italy and Spain would go with it.  As the bail out was announced, U.S. stocks surged.  But the damage was done.

Stocks are still up since a year ago, but a lot of that equity was lost.  Some say it was a much needed market correction.  In a way, I agree.  Investors started to feel that they were being left out of the party (considering that stocks rallied considerably since March 2009) and wanted to get into the action, driving up valuations.    The market correction has left some worried that the lost momentum from the stock market and the teetering European situation means that the U.S. is going to lose steam in it’s recovery.  But it won’t; it will only make our recovery stronger.  There are several positive indications that Europe’s struggle is in America’s benefit.

  1. A stronger dollar against the Euro should help bring in an influx of investment.  While a weaker dollar sent investors over seas, most wealth generated outside of the U.S. will start seeking to invest here.*
  2. The Fed funds rate is still around 0% to .25%.  Inflation hawks are going to have to start rethinking their position as deflationary pressures continue to rear its ugly head.  Mean trimmed CPI is on a downward trend, and with energy and commodity prices pointing lower, it will only continue to send overall prices downward.   This type of environment will keep the Fed from raising rates, making borrowing cheap.  With mortgage rates continuing to be low, buying a house is still attractive.
  3. The potential benefit for having low interest rates is that foreign investors looking for returns will look towards equity markets.  This means more potential growth for U.S. companies and the stock market.
  4. The stock market wasn’t the only thing that experienced slides.  So did commodity prices, especially oil.  Oil was moving up to around $90 a barrel until the market correction happened.  Now, oil prices are down to $75 a barrel.   Any increase in gas prices is taxing on consumers, but so far, gas prices have stagnated and won’t be increasing any longer.  The cost of inputs are now lower across the board thanks to declines in commodity prices, providing cushy margins for companies that lowers the pressure to raise prices, resulting in an absence of pain for the consumer.

As you can see, there is upside to the European situation.  I agree that it is still a gloomy situation for Europe in general.  Greece (and the like) face long-term structural issues that will make resolving their situation an incredibly hard task and I won’t be surprised if in 6 months Greece begins to default on its debt again.  But will it really drag down the EU? The rest of the countries such as Portugal, Spain and Italy should benefit from a lower Euro, helping wages that outpace productivity come to parity.  So should Germany and the rest of Europe, as a lower Euro will stimulate exports.  What needed to happen was a devaluation of the Euro  to a value more inline of what it is worth.  Yes, it is unfortunate that these irresponsible countries are essentially a drag on the EU, but that doesn’t mean the U.S. will have to suffer for it.

While the EU is a major trading partner to the U.S., I doubt there will be significant drops in demand for U.S. goods. There are more, higher growth areas for the U.S. to consider.  In terms of the U.S. recovery, if exports were the upside to the U.S. downturn, then U.S. exports to Europe is going to be the downside to the U.S. recovery.  But there is going to be a recovery nonetheless.

*And in minutes, this pops into my RSS reader: China boosts holdings of US Treasury debt by 2 pct

Waste products aftermarket: partIII – e-waste in the developing world

The UN  released  a report today detailing the dangers of e-waste in the developing world. (here) This issue isn’t new, but it is good that the UN is starting to realize how important it is to start dealing with this.   Not many of us know where our digital trash goes, but it mostly goes to the developing world.  The issue with this is that because of the valuable components within the waste, many of the poorest have taken the initiative, at the risk of their health, to disassemble the waste in order to obtain these valuable components and sell them.  Some grim details include:

Most of the recycling of electronic waste in developing countries such as China and India is done by inefficient and unregulated backyard operators. The environmentally harmful practice of heating electronic circuit boards over coal-fired grills to leach out gold is widespread in both countries.

The laborious task of doing this is often menial, tedious and most importantly, hazardous to one’s health, making it incredibly dangerous. But when weighing the option between eating and not, some will step up to take the risk and rummage through our e-waste for a few valuable components.

This issue was first brought to light after watching this incredible documentary called Manufacturing Landscapes. It has vivid images of the lifestyle that some Chinese have in taking part to profit from this, and it will either leave you shocked, fascinated or just downright disgusted.

A more deeper  look into the e-waste problem was documented by PBS’s Frontline.  The piece was entitled “Your Digital Trash.” It looks at some of the broad ramifications of e-waste that isn’t entirely environmental.  The most interesting part of this program was towards the end.  It dealt with an enterprising  social entrepreneur from India who built a business by investing in capital machinery that made the separation of parts for e-waste much more productive and less-hazardous to workers.  He hired workers at competitive wages to disassemble and collect the valuable materials from e-waste, all while ensuring a safe work environment.  Those valuable materials, most notably gold, would be then melted down in jewelery and sold on the street for a profit.  Right now the business is only small-scale, but there is potential, especially if India fashions a new law to ban digital dumps.

Before leading into the last segment of the program, the report focuses on a dealer who fills up empty container ships on the way back from the United States after delivering imports, and because the e-waste is loaded at little to no cost, sells them to digital dumps where they are taken apart irresponsibly. His quote certainly resonates when asked about environmental damage:

“I can only say one thing, if you want to do it environmentally, you have to pay. They have to invest in machinery, labor, everything. It isn’t worth it to pay so much money.”

I point this out because this is the real crux of the issue. Our e-waste is being sent to the developing world because residents who have a low-marginal product of labor are willing to take the risk and low pay in order to get the very small amount of value out of this waste. It shows how necessary legislation is needed in order to circumvent this, and jump start the proper investment where our Indian entrepreneur doesn’t need to fashion the valuable metals into jewelery, but is able to sell recycled waste on an open market. If it is possible to do this at Total Reclaim in Oregon, where labor costs are high and able to be sustainable through government support, imagine the type of value the developing world could get by investing in an industry dealing with e-waste responsibly. It will take some time before commodity prices will get to the point when it is profitable to invest in this type of business, but for now, legal intervention is the best way to jump start this industry so that it can innovate and build economies of scale and become a fixture of the industrial ecological web.

Breakthrough spotlight: self-assembling electronic devices

A new break-through in building small electronic components have been achieved not only with fine accuracy and ease, but can be done rapidly.  (here) Specifically, the new method is able to self-assemble electronic components by exploiting the effects of gravity and the interactions of oil and water.  You can read the specifics in the article, but the results, at least for creating a solar panel is this:

The conveyor belt process is to simply dunk the device blank through the boundary and draw it back slowly; the sheet of elements rides up along behind it, each one popping neatly into place as the solder attracts its gold contact.

The team made a working device comprising 64,000 elements in just three minutes.

This leaves two things to be desired: it is automated and can be made very quickly. Already you can see the economic benefits of this. It is cheap as it will not require any manual labor for production and the quality is unprecedented, thanks to the self-assembling nature of the process. Do something like that in a rapid “just-in-time” approach for demand and you have a huge downward pressure on the marginal cost for assembling an electronic component.

This report had me think on a subject that I come across at work a lot: high-tech manufacturing. Unlike traditional manufacturing, especially through the nineties, high tech semi-conductor manufacturing has been booming. Lately, however, that is not the case. High-tech manufacturing is getting hit hard by depressed chip prices thanks to increased competition from low-wage foreign labor costs. With an automated process such as this applied to a range of different electronic component manufacturing, it could be a positive indicator for the high tech manufacturing sector. It already is a reality for creating solar panels at a fraction of the cost, which is great for promoting demand for solar panels in the private market. And let’s not forget the potential for this technology and the possibilities it invites:

The approach should also work for almost any material, stiff or flexible, plastic, metal or semiconductor – a promising fact for future display and imaging applications.

Babak Parviz, a nano-engineering professor at the University of Washington in Seattle, said the technique is a “clear demonstration that self-assembly is applicable across size scales”.

Correlation vs. Causality

Take a look at this graph:

Looks like a pretty strong statistical relationship to me. To quote Steve’s Politics Blog (no, not me):

Derek Lowe of Corante’s ‘In the Pipeline’ (a drug-discovery blog) points to this graph in an article by Bristol-Myers Squibb’s Stephen Johnson, titled, The Trouble with QSAR (OR How I Stopped Worrying and Embrace Fallacy).

Lowe writes, ‘The most arresting part of the article is the graph found in its abstract. No mention is made of it in the text, but none has to be. It’s a plot of the US highway fatality rate versus the tonnage of fresh lemons imported from Mexico, and I have to say, it’s a pretty darn straight line. I’ve seen a lot shakier plots used to justify some sweeping conclusions, and if those were justified, well, then I’m forced to conclude that Mexican lemons have improved highway safety a great deal. The vitamin C, maybe? The fragrance? Bioflavanoids?

It just proves my saying:

“Sometimes statistical significances are just measured coincidences.”

HT: Chart Porn

Tire tariff costs U.S. $1.35 billion in lost savings

Tire prices are rising and some analysts are pointing fingers at the Obama administrations 35% tire tariff on Chinese imports.  I had previously vocalized why this was a bad idea: that although the current impact would be small, it could lead to a trade war with China.  Of course with any tariff, there will be a dead weight loss, resulting in a decline of consumer surplus.  So, how have consumers been affected by this? Explicit costs include: (From the AP article)

Under the government’s new tariff, which went into effect in September, a set of Chinese tires that would have cost $280 now cost nearly $100 more.

As well as implicit costs:

Jennifer Stockburger, a tire test engineer for Consumer Reports, says six of the top ten all-season tires recently tested by the magazine were made in China by major manufacturers.

More importantly, the price increases for domestic tires is expected to end up offsetting the tariffs.  Some of the price increases have been caused by an upcoming rise in demand due to an economic recovery and maintenance needs as well as increasing material costs for production.

Lets do a cost-benefit analysis.  17% of the tire market is made up of Chinese tires.  Tire sales for 2008 was around $27 billion, which means that about $4.6 billion is Chinese tires. With an average price of $280 for Chinese tires pre-tariff, the total quantity of Chinese tires sold would amount to 16.4 million.  With a $100 price increase, assuming that domestic tire price increases offset the tariff increase, U.S. consumers are expected to lose out on a net savings of over $1.6 billion.  And that of course does not take into account the implicit cost of quality loss.

The tariff was expected to stop the loss of employment in the U.S. tire industry.  By assuming there would be a benefit of saving 5,000 jobs in the tire industry, even at the median U.S.  income, that only amounts to a very large estimate of over $250 million of saved income.

Therefore, Obama’s tire tariff cost the U.S. over $1.35 billion dollars.  Lets not to mention the sour trade relations he has made with China, and considering how his current trip there went; he has made it even worse.    I hope his political support from the unions was worth it when he goes for re-election in 2012.  It is quite an expensive campaign contribution.

Fixed rates and protectionism: monetary stability as a guise?

Paul Krugman has an interesting blog post on comparing current protectionist policies in Ecuador put in place that are similar to those put in place in the U.S. during the great depression.   The reason? Krugman points to a new paper that yields evidence to suggest that protectionist policies were a crude means of attempting to gain monetary stability as opposed to the popular argument that it was just simply economic ignorance.   Assuming that this new paper is correct in its findings, ( which makes sense given the tumultuous environment of international exchange rates and the gold standard during the depression era) Krugman may have missed the difference between the Ecuadorian economy and the depression era U.S.

While the Ecuadorian dollar being pegged to the U.S. is an appropriate similarity to the gold standard, the U.S. was flush with gold reserves pre-depression, which marked it as an economic juggernaut for international lending.  This is a starkly different position than what Ecuador is in right now.

While the protectionist policies Ecuador has decided to use may help stabilize their monetary stability, Krugman failed to highlight an important peice of what Ecudor actually put it on: (from the article he quoted, here)

In January 2009 Ecuador announced a series of stiff import restrictions on 630 tariff lines, affecting 8.7 percent of its ‘tariff universe’ and 23 percent of the volume of imports. Duties were raised on 369 tariff lines and quota restrictions imposed on 271 others for a one-year period. They cover products ranging from processed foods and shoes to cars, mobile phones and sunglasses, as well as many other goods that can be manufactured in Ecuador.

Ecuador insisted that the measures it proposed were necessary to balance its widening current account deficit.

As you can see in bold, whether or not this really is a correct justification for stabilizing their monetary system, what Ecuador has done invariably (or intentionally) is take down the forced liberalization that the WTO places on many other developing nations.  In essence, Ecuador has made a move that will protect infant industries, which would hopefully help Ecuador be able to level the playing field concerning international trade.  This level of protectionism, for at least their infant industries, has been proven to work in many of the high growth Asian developing nations including South Korea, China, Malaysia, Taiwan, and Vietnam.   Ecuador has been able to use monetary stability as a guise for doing something more important for their economic development.  The best part? The WTO is unphased, as they will let Ecuador do what their doing for now and hopefully, they will keep it that way.

Krugman, there is a deep moral here and that is to give Ecuador the right to develop their economy, whether it is in the name of monetary stability or just plain old protectionism.