Friday, 14 March 2014

Huānyíng guānglín

China exports far more than it imports. Everybody knows that.  Oversimplified , the difference between goods and services exports and goods and services imports is called the Current Account balance. It can be a surplus or a deficit. China has seen a surplus for a long time. India has seen a deficit for a long time.

China's current account surplus reached a high of 10% of GDP in 2007. Under normal circumstances if such a chronic situation existed, the currency would rise making imports cheaper and exports costlier leading to an equilibrium. But China was controlling exchange rates, which led to massive imbalances in the world economy.  The US led the chorus terming China a currency manipulator. In any case, such huge imbalances affected the global economy in all sorts of ways.

What to do about the problem ?

Well, the problem has started to be solved by itself, in a way few would have anticipated . China's current account surplus has fallen to 2% of GDP.  What on earth has happened ?

China's surplus in goods continues to be vast. It continues to export merrily way above what it imports. What has depressed the surplus, however is that it now runs a huge deficit in services. Put together, the net surplus is now low enough not to be a burning issue.

How has a huge deficit in services been built up - at $122 bn, it is the largest deficit in the world (after all everything in China comes in gigantic proportions). Just one component contributed to  $ 80 bn of this $ 122 bn. Tourism with a capital T.

In 2007, China faced a surplus in tourism as well - more people visited China than Chinese visiting the world. In 2013, that has completely turned topsy turvy. Millions of Wangs and Lis are packing their bags and touring overseas. They exchange their yuan for dollars to spend. They are, in effect "importing a tourist experience". Hence this massive deficit !

The "solution" to trade imbalances that threatened the world is simple. Here's a neat solution for the US, which could be copied by virtually every country. Abolish the need for visas for Chinese to visit your country. Welcome them with open arms. Put up Chinese name boards, direction signs, everywhere. Train everybody in the tourism industry to speak Chinese. Open a million Chinese restaurants. Serve chicken feet for breakfast. Set up gambling resorts purely for foreigners if you don't want to corrupt the locals (the Chinese love to gamble; that's why Macau is many times bigger than Las Vegas now). Open  MSNBC Chinese and FOX Chinese (Yuk) ! Get P. Diddy to rap in Chinese. Get Ryanair and Southwest Airlines to fly to mainland China. Etc Etc Etc. Actually, the US government needs to do nothing - all this will happen anyway.

It will solve many problems. The trade imbalances will disappear. A huge spending boost will come to the US. Every teen star from Justin Bieber to Selena Gomez will add 100 million more fans. If American style democracy is indeed good for the world (a highly debatable hypothesis, but we shall let that pass), then exposing millions of Chinese to "freedom" (NSA notwithstanding), can only be to the good. Preet Bharara can turn to suing Chinese for violating sacred American laws by spitting.  A win win, if there ever was one. Or Wang Wang, if you prefer !

By the way, if you are wondering what the title of this post is, it is simply "Welcome" .


8 comments:

  1. welcome back! At a very fundamental philosophical level, you throw open your home to the "rich person" hoping you will benefit. A beggar coming to your place does not add any benefit to you. Perhaps this is reflected in the visa regimes of most countries. If you claim a citizenship from one of the rich OECD countries you have visa free entry compared to say, some one from Burkina Faso or Kiribati. Money talks and by that logic China has transitioned from the poor to the rich man status!

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  2. @Kiwi - Yes, very true. The rich have no visa requirements , but the poor do. You can be slightly more on the poorer scale, but if you are a white Caucasian country, that helps too !

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  3. As one holding a particular passport that is the envy of most of the people on this planet (haha) I feel that my citizenship requires me to pontificate here. (My roots as an argumentative Indian is a bonus!)



    Two points--the first one is the significant one, and the second one is not a trivial one.



    1. This whole trade deficit is one messed up statistics. Increasingly, there are louder and louder calls to how revise how this is calculated.

    From a recent one at Slate:

    "The big problem with these numbers: They assume that each finished product is made in a single country. According to the “rules of origin” established by the World Trade Organization, a finished good is ascribed to the country where it underwent its last “substantial transformation.” Generations, ago, an American car was made in greater Detroit with parts from nearby factories in Ohio and steel from Pennsylvania. Today, however, almost nothing—not T-shirts nor Boeing Dreamliners nor Nike shoes nor iPhones—is made in one place.

    Take the iPhone or the iPad. ... By 2013, Apple’s U.S. iPhone sales alone were adding $6–$8 billion to the trade deficit with China every year. ... But are iPhones really “made in China”?

    Analysts differ over how much of the final price of an iPhone or an iPad should be assigned to which country, but no one disputes that the largest slice should go not to China but to the U.S., where the design and marketing of such devices take place at Apple’s headquarters in Cupertino, Calif. ...

    Taking these facts into account would leave China, the supposed country of origin, with a paltry piece of the pie. The Asian Development Bank estimates that as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy.

    Now magnify this across hundreds, even thousands of finished goods.
    So, yep, that trade deficit number merely confirms that old idea about lies, damned lies, and statistics ;)



    2. The Chinese tourism aspect is not merely because of the skin color. In fact, one major problem is discussed quite publicly in the open.  I leave it to the interested reader to do a Google search for "chinese tourists manners" and read up on a few from respectable sources, and then read up a few from blogs where the details are a lot less wrapped up in euphemisms.  Interestingly enough, and typical of the Party, the Chinese government is actively working on this dimension!

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  4. Sandhya Sriram16/3/14

    it is really surprising though to see the power of the service industry. Maybe, India is missing a huge trick there.

    I was visiting hampton court palace in London last week. its a simple palace, a beautiful one, but under normal circumstances, you would take about an hour to see this around, but much credit to whoever runs the palace, even 5 hours were not enough. there are audio guides that make you stay atleast 5 - 10 mins in each room of the palace, making you live the story of the king. there are skits that run in between, bringing alive the life style, there are video beamed events through projection, and then, of course, a big bomb entry ticket.

    But you feel worth it at the end of the day.

    We have tons and tons of such places. actually, Ramesh - Eureka - YOu have struck the golden suggestion for India to counter oil deficit - Dr.Chiranjeevi - are you listening?

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  5. @Sriram - With all due respect, Zacahary Karabell is peddling twaddle. There is nothing wrong about measuring Current account deficits and surpluses - they measure actual money flows. China accounts for all the parts it imports, including the royalties it pays for technology in its outflows and only the actual revenues it receives as inflows. So if the value added is only $10 an iphone, that's all will be the impact on the current account. Since almost all forex flows goes through the banking system (except for smuggling), current account figures are some of the most reliable economic indicators.

    As for your second point, I disagree with that too. Sure Chinese, Indian, or for that matter any nationality tourists follow their own practices when they come, and we may find some of them strange, or disgusting, or even offensive. But then that's the point of travel - you see the good , the bad and the ugly and you get a better understanding of another culture. For most natives, they will never travel to other countries; and so tourists are the best way to experience another culture and such interaction does wonders in broadening minds. As for the suggestion that Chinese tourists have a greater component of unpleasant habits - perish the thought - if I write about equally unpleasant stuff which other nationalities peddle ........

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  6. @Sandhya - Tourism in India is a no hoper - we have become one of the most tourist unfriendly nations on earth. Sure India has much to offer for a tourist, but we go out of the way to make a tourist's experience unpleasant. Athithi Devo Bhava has flown out of the window a long time ago - one of my interests is to read travel blogs and the uniform conclusion of a foreigner coming to India is - never again. The stories of hardships they face makes me cringe. I vote for sacking the tourism minister, closing down the ministry of tourism and wait till we all , collectively, rediscover athithi devo bhava.

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  7. Well ... I brought up the trade deficit issue because your post referred to trade. But otherwise, the international income accounting is way beyond my paygrade ... All I have left is my gut instinct that we need a better measure of economic activities for the highly globally interlinked post-industrial world ...

    As for the other point, this is not a new kind of problem either. As Americans got rich, Western Europeans thought that Americans were crass and had no culture. (And even now quite a few Europeans think that way.) To me, this is all a part of the behavioral aspects of getting rich. And those aspects come in to a focus a lot more when the get rich happens way too fast. The more we travel, the wiser we become and the generations that follow build on that acquired wisdom ...

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