1/8
Those of us concerned about the cost to the US economy of unbalanced trade have to distinguish between imports driven by differences in manufacturing productivity and imports driven by lower labor costs (relative to differences in productivity).

freep.com/story/money/ca…
2/8
Because Mexican wages are in line with Mexican productivity, when GM offshores production to Mexico, the money Mexicans earn by exporting to the US is recycled through wages into an equivalent amount of imports, and these come either directly or indirectly from the US.
3/8
In that case higher US imports from Mexico are matched by higher US exports (either to Mexico or to some other country) and the net result is a shift in US manufacturing from less productive industries to more productive industries.
4/8
There is no net loss of jobs for American workers, just better jobs. This is how trade is supposed to raise global welfare: by allowing higher levels of specialization and by shifting demand from less efficient to more efficient producers.
5/8
Offshoring is a problem, however, when American businesses offshore production to countries – like Germany, China, Japan, Sought Korea, etc. – whose “comparative advantage” is that their workers are paid less relative to their productivity than American workers.
6/8
In that case global production isn’t made more efficient. It shifts to countries where workers get less of what they produce and business owners more. This, as @M_C_Klein and I explain in our book, worsens income inequality and reduces global growth.

yalebooks.yale.edu/book/978030024…
7/8
It's important that we don’t approach things like offshoring, imports, trade, etc. as good or bad in and of themselves. Under certain conditions they can be good for growth, and under other conditions bad for growth. Offshoring certain kinds of manufacturing to countries...
8/8
like Mexico (or Canada) is usually good for the US. It allows manufacturers in the US, Mexico and Canada to take advantage of the benefits of a larger North American market. The key is that none of the three countries compete by directly or indirectly lowering their wages.
Trade discussions have been slow in coming.

scmp.com/news/china/dip…

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Michael Pettis

Michael Pettis Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @michaelxpettis

1 May
1/5
This isn't quite true. According to the PBoC release, China’s debt-to-GDP ratio declined 2.6 percentage points in the first 3 months of 2021 from 279.4% to 276.8%. As is too-often the case, they don’t give us the numbers on which they...

bloomberg.com/news/articles/…
2/5
base their claims, and so it is a little difficult to know exactly what they mean, but among other things I calculate a slightly higher debt ratio for the end of 2020 (RMB 284.8 trillion of total social financing divided by RMB 101.6 trillion of GDP is 280.3%).
3/5
More importantly, while their claim that China’s debt to GDP ratio declined in the first quarter is technically true if GDP is calculated over the previous 12 months, this suffers from a major base effect.
Read 7 tweets
29 Apr
1/7
Important article by @Birdyword, who discusses the shift from bank loans to buyers' deposits in the liabilities of Chinese property developers. As usual I'm especially interested in the balance-sheet impact: as long as things are going...

wsj.com/articles/beiji…
2/7
well, the shift barely matters, but it matters a great deal if the developer ever gets into trouble and is unable to finish a project.

This creates at least two problems. First, a default by a large developer can cause what is effectively a "run on the bank"...
3/7
as other buyers around the country become reluctant to put up further deposits with other property developers. This process that can be highly self-reinforcing as it forces property developers to cut back further on operations, and so alienate even more deposits.
Read 7 tweets
29 Apr
1/6
Another very good Frank Tang article. There is a lot of confusion about the systemic impact of aging on the rebalancing of the Chinese economy. The article cites Cai Fang as worrying that “China’s population could peak before 2025,” and that...

scmp.com/economy/china-…
2/6
this "could cause growth to plunge and lead to insufficient demand. It would generate an unfavourable impact on our push for consumption."

I think that's the wrong way to think about it. One of the main impacts of a declining population is to reduce overall growth.
3/6
Because the value of investment today depends in part on future growth, this also reduces the value of existing investment in property and real estate (implicitly forcing up the debt burden even further). A declining population makes rebalancing demand all the more urgent.
Read 6 tweets
27 Apr
1/5
Very interesting Caixin article. Beijing has stopped work on two HSR projects in Shandong and Shaanxi because of provincial debt concerns. In both cases they cancelled the projects after discovering that they were designed mainly to create..

caixinglobal.com/2021-04-26/as-…
2/5
economic activity, and were not otherwise expected to generate enough economic value to justify the expenditures.

In fact this can probably said of many if not most HSR projects initiated in the past decade, which is why I suspect the real reason these projects were...
3/5
stopped (and I expect there will be more later this year) is because the regulators know that they won't need high levels of unwanted investment to achieve the GDP growth target this year. If they want to show that they are serious about deleveraging, they must limit the...
Read 5 tweets
26 Apr
1/4
It would be a little worrying if Mofcom took this seriously. A month-long "national consumption festival" to "unleash spending potential" strikes me as suggesting just how difficult it is for Beijing to boost the relative importance of consumption.

scmp.com/economy/china-…
2/4
There are literally only two ways you can boost the consumption share of GDP. The more sustainable way is to raise the household share of GDP (directly, or indirectly through government spending).
3/4
The other way is to convince households to reduce their savings or, which is the same thing, increase their debt, and the only sustainable way of doing either would be to redistribute household income downwards.
Read 5 tweets
26 Apr
1/8
This WSJ editorial makes an interesting but misleading point :

It quotes "a former U.S. President" as saying: “The tax on capital gains directly affects investment decisions, the mobility and flow...

wsj.com/articles/the-d…
2/8
of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy.”
3/8
And then it presents the surprise reveal: "That wasn’t Ronald Reagan. It was John F. Kennedy, whose chief economic adviser was liberal Keynesian Walter Heller. A Democrat who said that today would be excommunicated, but it’s nonetheless true."
Read 9 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!