Your Next Car ‘Made in China’?

China is getting into car manufacture in a big way, but before going further with this, let me sidetrack you to another article in today’s FT. Here you will find two interesting details. Firstly, according to Arthur Kroeber, of China Economic Quarterly, ?Since 2003, China has gone from being a net importer of capital goods to being a net exporter”. I’m still loking for some confirmation of this, but if true, it is very significant. The other detail: overcapacity means there is a continuing price war in China, and factory gate prices are falling. This point needs to be borne in mind by all those who imagine a rise in the value of the Renminbi would produce a comparative increase in ‘mark to market’ prices for consumers. I’m with Morgan Stanley’s Andy Xie here, overcapacity is likely to be such that the ‘pass through’ rate would be minimal, most of the on-costs being absorbed by an ever more deflationary environment in China.

Interestingly enough, Jean Claude Trichet gave three arguments, at the end of his press conference yesterday, in order to justify the urgent necessity for the Lisbon Agenda: ageing, technological changes, and growing global competition (or labour arbitrage in Stephen Roach’s language). I couldn’t agree more.

Now for the cars. Yale Global has reproduced an interesantissimo supplement from the FT:

Automakers may see China as a growing market, but soon they may face unexpected competition from a number of manufacturers who are seeking to export to the West, as well. Several Chinese companies have already begun a trial run in the Middle East to prepare for the US market, the goal of more than two decades of attempts to build a competitive car industry. The Chinese companies will encounter numerous obstacles and opponents ? including the multinational companies that currently dominate the global markets ? but if successful, they could reshape the auto industry. Because the economies of countries like the US and Germany depend heavily on the auto industry, the implications of such a move are substantial. How will the West respond?

Read-on here

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

16 thoughts on “Your Next Car ‘Made in China’?

  1. Thanks Guy, I’m on to it.

    I found this link.

    http://www.forbes.com/business/commerce/feeds/ap/2005/06/03/ap2074604.html

    Basically this is nothing new, since there have been even more entrenched opponents of the euro in Italy than there were in Germany, remember the fuss on the first day? They weren’t even prepared, and then I think a minister had to resign. Basically this is just NL populism, but the significant thing may be that he’s saying it and the press are picking it up. My feeling is that all this is n’t going to go away easily.

    Markets are stationary, but my guess is there is more or less official support somewhere in the system. No one wants a real euro crisis, especially not now with the political system so weak.

  2. The German “STERN” in its large discussion of the Euro carried the interview with Social Minister Maroni, too.

    Maybe for his government, it is easier to blame something else rather than to change any botched policies ?

  3. You asked for a discussion on trade with China.

    Very well. I thought about it.
    It seems to me that classic economic theory predicts that unrestricted trade should develop on comparative advantages taking into account the cost of transport. Thus current and predicted future prices should determine who imports and exports, hence produces, what.
    This brings me to innovation. The expected gain in efficiency by innovation should be a factor in the decisions what to produce, shouldn’t it?
    Now I consider it obvious that not all industries have an equal potential for innovation. Furthermore, it seems to me that any individual investor will never reap the full benefit of all innovation he funds. The whole can be greater than the sum of its parts. Thus I conclude that trade although in a static sense it would benefit both sides, can destroy innovative potential in one side.
    Does this make sense?

  4. “Democracy for China now!”

    Yes, and Bar?a for the Champions League. The interesting thing would be to find out how to achieve these objectives. Obviously the ‘iraq’ solution has suddenly dropped out of favour.

  5. “Furthermore, it seems to me that any individual investor will never reap the full benefit of all innovation he funds”

    This is the thing about first and second mover advantage. If you’re first mover you only have till the second mover comes along, and so on….

    “not all industries have an equal potential for innovation”

    and not all industries have the same ‘value-added’ potential for the innovations when implemented.

    “The whole can be greater than the sum of its parts.”

    This is the whole idea behind free trade and global growth right now, the so-called externalities.

    “can destroy innovative potential in one side”.

    Yes, it does make sense, and you are probably right. That is why you have ‘rises’ and ‘declines’.

    Try this one and tell me what you think:

    http://www.nber.org/~confer/2005/cas05/dooley.pdf

    intellectually it is very impressive, but it may be flawed. This is what I am thinking about at the moment – in between all these damned euro crises that is :):

  6. Interestingly, the VW has just introduced the (I heard) first car developed in Brazil (by VW of Brazil), VW Fox, as their new low cost model in Germany. VW Fox vehicles will be manufactured in Brazil and imported to Europe.

  7. In a nutshell:
    Keeping a currency down is an export subsidy. They need not worry about accumulating foreign currency as long as their economies grow quicker than that currency. The subsidy contributes to that.
    Meanwhile they have a nice political blackmail weapon and when they are finished they are competitive themselves.

    To that I might add that a one child policy is the way to get a well educated generation best suited to exploit innovation.

    It reads like a conspiracy theory, but I see no obvious flaw.

  8. “They need not worry about accumulating foreign currency as long as their economies grow quicker than that currency.”

    I think this is the point. It seems to cost some people a lot to understand it. Put more precisely, as long as the quantity of the losses accrued through holding that currency are less than the economic growth benefits obtained.

    The real implication of the paper is that the current US admin is using the ‘value transfer’ that is ocurring in this implicit pact – all those subsidised govt bonds – unwisely: eg on an ill advised war in Iraq, and tax cuts to the rich.

    The are really 10 year structural fund type subsidies to the US from China to enable it to make the transition out of the industries which China will dominate (are there any she won’t: I don’t know), and restructure to achieve a more modern, more competitive economy. Basically this money is being frittered.

    Getting rid of Saddam was terrific, but is it worth the price, not only to Iraqui civilians, who are now dying at a faster rate than under Saddam, but to the ordinary US citizen who is footing the bill, and not preparing the future?

    This is the view I am coming round to.

  9. Edward,

    In this post you can see a graph showing the overal trade balance between the EU and China, de trade balance in garments and the trade balance in machinery and electric equipment. And indeed since 2003 China has a surplus in the last category also. The link is: http://simonworld.mu.nu/archives/084904.php

  10. The real implication of the paper is that the current US admin is using the ‘value transfer’ that is ocurring in this implicit pact – all those subsidised govt bonds – unwisely: eg on an ill advised war in Iraq, and tax cuts to the rich.

    Well, this raises some issues. If China bought dollar no matter what, selling government bonds would be the sensible thing to do. That blackmail stuff works both ways. The US could in theory declare that debt null and void in case of war or something like that.

    As for the use the money was put to, I don’t think we can judge that yet. However, I might point out that I don’t think that Afghanistan was a sufficient response to 9/11. There would have been more war, the question was just which kind of war.

    Thirdly, absurd as it may sound, a tax cut for the rich is easier to repeal than a programm for social spending.

  11. “The US could in theory declare that debt null and void in case of war or something like that.”

    This might be possible, but given there are no special treasury notes marked ‘for sale only in China’ this would risk the whole international financial system. Of course I’m not saying that one day it couldn’t come to that, but I do chose not to think about it.

    “a tax cut for the rich is easier to repeal than a programm for social spending.”

    No, this I buy, there are certainly more votes this way. BTW US govt debt is not the only thing China is buying. Technology corporations are another:

    http://www.reuters.com/newsArticle.jhtml?type=electionsNews&storyID=8615122

    I don’t think enough attention is being given to this aspect of the situation.

    On another front the US/euro situation is not the conventional struggle of the fittest, but rather ‘may the weakest man win’ (since this one can depreciate his currency) a kind of struggle of the most infirm. The euro is being supported by weak jobs data in the US.

    Also, thanks Ivan for the link. It’s on bonobo :).

  12. Yes, it does make sense, and you are probably right. That is why you have ‘rises’ and ‘declines’.

    Well, are you implying that some protectionism might be a good idea?

  13. “are you implying that some protectionism might be a good idea?”

    Ah, now you want to make this into a trick question:).

    No this is not my view at all. You are implying that you absolutely need to resist a relative decline. I don’t agree. All through the last century the UK was in relative decline. The worst moments were when she refused to accept what was happening. Now I would say the UK is as fine as anyone can be, ie nothing is perfect.

    This kind of scenario now faces the US.

    Should the rest of world be happy with the rise of China and India. I personally am, but I can understand that others are preoccupied.

    What do you need to do if you don’t want the worst of what lies behind your question to happen:

    you say:

    “trade although in a static sense it would benefit both sides, can destroy innovative potential in one side.”

    (incidentally Paul Samuelson caused something of a fuss when he explained more or less what you want to say, sometime late last year. Bhagawati also got in on the act and tried to refute Samuelson: I think this time Samuelson won).

    The thing is this, something like this can happen, if you have no ‘strategic plan’. You need to look for niche activities, diversify, things like this. Sweden, Denmark, Netherlands etc all survive with bigger neighbours. And you can’t stop others having a strategic plan just by telling them that you’re the best, and your system is based on not having one, so really no-one should have one.

    I don’t know if I’m answering you.

    On proetectionism, one important argument that only occured to me clearly last night is this: ageing, pension funds, and the global savings surplus.

    Really most thinking people have realised that with shrinking labour forces OECD societies cannot maintain their living standards (and pension funds) simply by having those able to work work. They need to export savings, and this means to the non-OECDdeveloping world, in the form of investment.

    So that means, ironically, we are all tied together more than ever before. If you want a pension, protectionism is out. However looking at recent votes, its plain that reality is one thing, and what people want another.

  14. No this is not my view at all. You are implying that you absolutely need to resist a relative decline. I don’t agree. All through the last century the UK was in relative decline. The worst moments were when she refused to accept what was happening.

    Among that I would count the First World War. I don’t disagree about relative decline. But what makes you think we’re necessarily facing only relative decline?

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