China and the U.S.: The analysis of Trump’s trade war should include psychology

3 June, 2019

Kina och USA: Handelskriget kräver också psykologisk analys

Sammanfattning på svenska

Som det skrivits tidigare på denna bloggsida, leder traditionell västerländsk analysteknik mestadels ej till riktiga slutsatser avseende det pågående handelskriget – speciellt inte för finansmarknader. Väldigt mycket i den växande protektionismen handlar om psykologi, både på USA:s och på Kinas sida.

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The ongoing trade war between the United States and China has been widened further only recently. Also Mexico was included in American trade protectionism only a few days ago.

Protectionism is not a new phenomenon. It showed up historically in politically and/or bad economic times. The main objective of protectionist measures used to be the support to less competitive industries at home.

The American president still uses this historical explanation of protectionism. But he has also widened this historical application by adding political and immigration issues to the list. China and Mexico are hit in this specific case.

In recent months, I was persistently doubtful about president Trump’s suggested progress during negotiations with China and North Korea – particularly due to his frequently exaggerating and changing attitudes. Trump functions  simply this way and will most probably do so in the future.

Economists are no psychologists and have, of course, no professional skills to analyze people’s behavior more deeply. But we should understand that neither Trump nor the Chinese apply traditional Western ways of thinking. This fact make them different in analytical terms.

Trump lives in a world with five foreign main opponents: China, Iran, Mexican immigrants, German/EU non-American car buyers and mostly – but not always – North Korea. Fundamentally, the current American president regards China and Mexico as the outstanding challenges: China because it may threaten the American global supremacy and Mexico because of its refugees and emigrants still coming to the U.S. Also in this latter context, Trump shows no empathy.

The currently relevant psychology of the Chinese is different from the American. The Chinese do not want to be treated as second after “America first”. The Chinese want to be respected and be regarded as equal partners – partners who also would compromise themselves quite a bit in difficult trade issues. The key words for the Chinese are doubtless “respect by the Americans”. This has indeed a lot to do with psychology.

The French economist Frederik Bastiat wrote roughly 200 years ago: “When goods do not pass borders, soldiers will”.

Nowadays soldiers are not relevant in this context anymore – but certainly trade barriers. Four months ago, previous Fed chairwoman Janet Yellen seriously questioned Trump’s skills in macroeconomics and economic policy. We are still waiting for Trump to prove the opposite.

Altogether: This shortcoming and peculiar psychological conditions will make it extremely difficult also in the future to comment on potential negotiation progress between the U.S. and China.

President Trump is certainly by action  neglecting all harmonizing research in foreign trade. Professor Greg Mankiw, for example, writes on this issue: “Economists are famous for disagreeing with one another…But economists reach near unanimity on some topics, including international trade…”

We learn from this analysis that the U.S. currently applies trade policy in a non-conventional way. Therefore, psychological aspects gain currently momentum in Trump’s trade protectionism.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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India – final conclusions after the elections

29 May, 2019

India’s enormous elections to the Lower House (Lok Sabha) are over. The big winner is Narendra Modi from the hindu-nationalist BJP who even achieved absolute majority in the new Indian parliament. Modi’s victory did not come as a major surprise – but the way he did it, including his very successful marketing.

During Modi’s previous period as a Prime Minister, the Indian economy already improved but certainly not as successfully as described by Modi’s supporters at home and by major parts of the global financial and corporate sector (which can be read about in some previous blogs of mine on chinaresearch.se).

The shortage of resources

Still a lot of weak issues have to be improved or reduced in the “continent” of India. Institutions (for example, quite a number of the new parliament members are even crime-suspected), poverty, the environment, agriculture with still more than 50 percent of total employment, income distribution, productivity, competitive manufacturing to a quite high extent – just to mention a few areas on a long list.

Looking at all these challenges, the forthcoming five years will not be easy for the BJP, Prime Minister Modi and his allies. Political tensions exist mainly with Pakistan. Relations with China seem to be commercially pragmatic but not very good either (which is demonstrated by India’s more or less total neglect of China’s prestigiously favored Belt & Road Initiative).

For the above-mentioned and quite a number of other reasons, India is certainly a country lagging institutional, educational and particularly financial resources to achieve rapid – i.e. at the same time fundamentally sustained – progress in production, infrastructure and the environment. High public debt on all levels is a frequently neglected impediment to even higher growth and to a more favorable distribution of income.

However, the economy of India has the potential to improve further during a long period of time. Macroeconomic growth data alone, however, remain an insufficient analytical tool – a reality that many (Western) analysts to not apply the way they should. Not to forget India’s demographic potential which – theoretically – is much more favorable than China’s in the forthcoming decades.

“Theoretically” because India also must create the necessary institutional and financial resources. And here we come back to the shortage issue of necessary resources …

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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China – weakening financial resources for investments abroad (FDI)

15 May, 2019

Kina – sämre finansiella förutsättningar för investeringar utomlands (FDI)

Sammanfattning / Summary in Swedish

# På senare tid har det utvecklats en hel del oro över de kinesiska direktinvesteringarna (FDI) i vår del av världen. Man befarar främst ett för snabbt växande kinesiskt inflytande på den egna hemmamarknaden och på de viktigaste exportmarknaderna. FDI-statistik visar emellertid att siffrorna för den faktiska kinesiska FDI-utvecklingen utanför Kina alltjämt ter sig klart mindre skräckinjagande än vad tongångarna i den offentliga debatten återspeglar.

# Utvecklingen av den kinesiska bytesbalansen borde framöver ägnas mer uppmärksamhet än vad det på bred front varit fallet under det gångna årtiondet. Utvecklingen av bytesbalansen spelar en avgörande roll vad gäller den kinesiska potentialen för framtida FDI-satsningar. Det aktuella läget ser klart mindre lovande ut för kineserna än vad vi vant oss vid under rätt många år.

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The analysis of a balance of payments (bop) receives clearly less (careful) analytical focus these days than ten or twenty years ago. The reasons for this development are not easy to single out. One reason may have been that global trade tensions until Donald Trump’s takeover received decreasing attention by global (financial) markets, policymakers and papers or articles – and that bop problems indeed became less acute and/or irritating.

More recently, however, things started to be reversed – mainly triggered by the American president and his hostile trade position against China and to a (still) milder extent against the EU (Germany). These tensions should indeed provoke a better understanding and practical application of bop studies.

Where does the money for Chinese outgoing FDI come from?

In general terms, there are only a few ways for a country to create foreign money for so-called direct investments outside China. Fresh foreign money can be made available

– by attracting new FDI (normally the best way as the invested money usually comes to stay),

– by borrowing money in foreign currency (but an ever increasing foreign debt hurts later on),

– by selling stocks and bonds to abroad (risky as foreigners may decide on sudden sales),

– by selling foreign currency from the own reserves (cannot last for a long time).

However, one can assume that the Chinese preferably would like to return to reasonable surpluses in the current account and to persisting good inflows of FDI to China for being able to make more strategically important investments abroad. Is this a realistic objective?

Are German (Western) concerns about Chinese FDI exaggerated?

In Germany and quite a number of other Western countries doubts about Chinese FDI have become more noisy. However – at least so far – such doubts are not confirmed by statistics, particularly when it comes to the number of different new FDI projects. Obviously, Chinese FDI in Germany represent mostly a limited number of larger FDI – but they are not broadly spread (se IfW, Kiel, 2019, April).

Another issue in this context remains more or less undiscussed – China’s strongly weakening current account. Through many years, China noted remarkable surpluses – with a record at 10.1 % in 2007. In 2018, however, the current account came in close to zero (+0.4 % of GDP). This quite weak result has certainly to a high extent been caused by trade protectionism and a still lagging development of new competitive products for exports. Thus, there may be both temporary and structural components in the the nowadays more or less balanced current account.

The outlook – less Chinese money for FDI around the world

China’s foreign trade faces currently very tough challenges and will continue to do so in the foreseeable future. These challenges are both linked to international political developments and domestic reform achievements. In this latter respect, both exports of goods and services need to be modified and modernized, and imports substantially substituted by domestic production; all this according to textbooks for getting back on track for a stronger balance on current account and improved new resources for future FDI. As indicated above, borrowing heavily abroad for FDI in other countries is certainly only a short-term option. Creating major capital inflows to China by attracting high amounts of portfolio investments from other countries should be regarded as risky and assumes far-reaching further financial reforms and deregulations of the capital balance (the counterpart of the balance on current account).

Altogether, all these possible attempts to achieve a rejuvenation of the current account balance need time to become successful. With current conditions, the outlook for the Chinese current account balance seems to be neutral in a sense that no return to major surpluses seems to be in the cards any time soon – but no major deficits either.

Consequently, financial resources for future Chinese FDI in other countries seem to develop less rapidly than in the past. This means that China – if it wants to remain an active investor in other countries – needs also to reorganize its strategy for the already existing financial assets, for example by gradually reducing the big share of American bonds and t-bills in Chinese portfolios.

Obviously, it becomes increasingly important to find the relevant statistics for these assets – and to become familiar with the interpretation of the balance of payments and its sub-balances.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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