What is Stephen Roach Smoking?

Morgan Stanley economist Stephen Roach thinks that the USA should pin its hopes for economic growth on increased exports to China. Sounds reasonable, right? China is a fast-growing market after all. But this is probably the dumbest strategy possible. China is a hard-core mercantilist power, and we’ve seen this movie before with Japan.

We have spent decades trying to get Japan to open its markets. And to this day, only 5% of the cars sold in Japan are imports, as opposed to 52.9% in the USA. The Japanese say that their consumers don’t like imports, but in reality Japan is the master of non-tariff trade barriers.

We will see the same from the Chinese. And we will not live to see the day of open markets in China. If we couldn’t accomplish it with Japan, a political ally, how can we expect to fare better with a non-ally like China?

The Chinese have studied the USA-Japan trade relationship, and they have vowed not to repeat Japan’s “errors” – especially the Plaza Accord “error” where Japan allowed the USA to push up the value of the yen.

Roach says not to worry about the yuan because it has been strengthening. But that is not an accurate statement. As a matter of fact, it is a deceptive statement because the PBOC sets the value of the yuan versus the dollar. Roach is trying to fool us into thinking that the value of the yuan is set by market forces.

The fact is that Beijing has been forced by US outrage to fix the yuan higher. We’ve made a tiny bit of progress, but Stephan Roach wants to put an end to it.

What are we supposed to think when confronted by an economist who argues for “free trade” in everything except the yuan? An economist who defends having the yuan set by dictate in Beijing?

When asked (in the linked interview above) how we can level the playing field with China, Roach responds: “Deflect attention away from the currency.” He went on to denounce China’s mercantilist trade practices, but that was an odd way to begin his response, no? “Deflect attention away from the currency” sounds like a talking point to me; probably written by some multinational PR flack.

Each time the PBOC inches up the yuan-dollar peg, the massive sweatshop profits of the multinationals inch down.

Is it impossible to simultaneously pressure the Chinese to float the yuan and open their markets? Not at all. So, Roach’s argument is completely specious.

And the Chinese haven’t strengthened the yuan very much at all in the grand scheme of things. They have only reversed a little bit of their massive devaluations from the 1980s and 1990s. Go here, and make a long-term chart and see for yourself.

Of course, demand for yuan is far higher than it was before the Chinese started devaluing. Just think how many yuan Apple needs to purchase when they go to China to buy iPads from Foxconn. How high would the yuan spike if allowed to float? I don’t know, but you would be hard-pressed to find an economist who thinks it would decline.

If you are bullish on the yuan, you can buy the CYB ETF. However, if you did so when CYB began trading in 2008, you would have only a 1.35% gain. That’s the peg in action. Below is a “percent change” chart comparing the CYB (red line) to the FXE euro ETF (blue line). Click chart to enlarge:

I’m comparing the yuan to the euro to showcase the difference between a currency set by market forces and one set by dictate. The euro bounces around; the yuan is practically a flat line. Anybody who says that China is not a currency manipulator is full of it. The movements of the yuan are purely artificial.

Note: According to the Best Selling Cars Blog, there were no imports at all in the top-30 selling cars in Japan in 2011.

10 thoughts on “What is Stephen Roach Smoking?

  1. Having lived for years in Japan I promise you that our cars are completely unsuitable for their conditions AND the Japanese ARE masters of non-tariff barriers AND the Japanese are amongst the most chauvinistic people on God’s earth. They need no official urging in this regard.

    As to currency manipulation, the USA has been doing it since we got our own currency and are doing it more energetically today than ever in our long, proud history. What’s new is that there’s a country that’s big enough and smart enough and tough enough to do it, too. And that’s not going to change.

    Which leaves Professor Roach’s preferred alternative. Faute de mieux, as the Forggies say. Let’s buckle down to it.

  2. There is much more inflation in China than in the US, maybe 7% difference. This has the same effect as revaluing the yuan upwards by 7% a year.

  3. Roach is President of Morgan Stanley Asia — he’s getting bought off to say silly things like, “the US has a trade deficit with 80+ countries, don’t worry about PRC” (even though the PRC accounts for 75% of the non-oil deficit)…

  4. godfree,

    OK, but what about German cars? Or Korean cars? Or Italian cars? Are all the cars of the world unsuitable for Japan?


  5. Do the American auto makers even make right hand drive cars for countries like the UK, Japan, Australia, India, South and East Africa, etc.? From what I know, there are no distribution or sales centers for American autos in the majority of these countries.

  6. I am not an apologist for NTBs or for mercantilism as anyone who’s read my posts over the years will attest. Yet the incredulous tenor of your comment about the Japanese attitude towards imports requires, I believe some introspection on your part. The best way to highlight this is a simple anecdote. I used to drive Saab9000 Turbo. It was a nice car, (and fast) though perhaps it had too much torque for my adoration. Nonetheless, as I was reading the Frankfurter Algemeine Zeitung’s tally of imported vehicles into Germany in the presence of my brother-in-law, (a bona-fide German Herr Doktor PhD, well-travelled and perfectly fluent in French and English, and married to a French Girl), I remarked on the article I was reading about auto imports into Germany and how unbelievable it was that Saab had sold ONLY 5,000 vehicles into Germany during the past year (mid-nineties it was). He looked at me quizzically and asked with total seriousness “But Why are you surprised??”. I said, I owned a Saab, they are nice cars, very well engineered which Germans should appreciate, and Sweden is right next door”. He laughed, and said he wasn’t surprised, and “continued now derisively saying “we Germans make the best cars. No German in their right mind would buy a Saab if they had a choice…”

    Considering for the most part the average Japanese is similarly proud of their engineering, think Americans in general make shittily-engineered products with no regards for their preferences (practicality, smaller size,. reliability, and fuel efficiency), and that Japanese are mistrustful of foreigners in general, American export performance is hardly surprising. And while there have been and continue to be pecuniary issues and NTBs that exist but are no means insurmountable, the real issue is that the Japanese – more than perhaps any other nation – prefer to buy Japanese (with the exception of a few branded luxury goods). Importantly, the reason is the same reason Hasidics do business with Hasidics, and shop locally amongst Hasids where possible. The muslim Butcher across town can accuse them of unfair trade practices, but the over-riding reason is preference, NOT obstacle – something GM and Ford and Chrysler NEVER learned, and never HAD TO LEARN, because the reality was Japan was a pissy in comparison to the US domestic market – a rounding error.

    At present, the number of global companies surprising to the upside as a result of Chinese (and other developing nations’ ) domestic demand suggests that the issues are not identical, and that it is not completely stupid idea. Of course as a mercantilist nation with few scruples, China presents other challenges relating to intellectual property and corporate espionage, and, like the US’s Govts own purchasing decisions, an OFFICIAL preference for its own co.’s products. Just saying…

  7. nihoncassandra,

    I guess the Germans were right about Saab after all, seeing as how they went bankrupt and tried to sell GM’s intellectual property to the Chinese. Do they even make cars anymore?


  8. First, you are right about exports of final goods to China. I have written an article


    about the reluctance of the Chinese to purchase finished goods from the West, dating to at least the expedition of Lord Macauley in 1792-1793. Much like the comment from godfree about the Japanese, the Chinese can be expected to favor local products for chauvanistic reasons. There will always be exceptions to these rules, particularly for luxury items – French wine, German cars and the like, which are very clear status symbols. But the historical precedent indicates a deeply ingrained preference for national products.

    As to the other argument – that US manufacturers do not tailor products to non-North American consumers, there is some truth to this, but they do a much better job of producing such cars than the anecdotes suggest.

    For the record, the US auto firms do produce right hand drive cars for many overseas markets. GM however, has done best when it has purchased a local brand and sold its cars under that marque (Holden in Australia, Vauxhaul in the UK and Opel in Germany). Ford sells under its own name, and its European product at least, is first rate (better than it’s US product). Ford, however, has invested more in small engine/high-output technology than GM has, which is why Ford’s overseas operations are profitable. Chrysler has never had success outside of North America, which is why it is now in the hands of Fiat, whose engines and platforms should be more suited to foreign consumers.

    American manufacturers’ challenges with Asian markets are problems even for the Asians. Do you really think the Japanese are purchasing Hyundais? Even the Germans produce cars in China under majority-Chinese ownership joint ventures.

    The US has traditionally competed on scale, and therefore has focused on mass market goods, which is why it has had difficulty with consumer discretionary product sales in Asia – exactly the consumer segment that favors local production. What they have learned from their experience is that you have to localize to succeed. In China, they are adopting this strategy. It has risks of its own, and it is certainly not the same as selling under your own brand, but it does get you a piece of the action, at least in the short term.

  9. Early 90’s Mercs, BMWs and VWs were hardly better, with MB notoriously unreliable. GM ran poor Saab into the ground (unlike Ford with Volvo which at least tried their best). Saab never reached the scale it needed, despite good engineering. I think everything is idled for the moment and possibly forever. The IP was more likely Saabs in the first instance.

    Anyway, point was local preference (whether for good or bad reasons like Hasids) a weak currency (UNTIL 2009), and idiosyncracies of Japanese culture and language have been far more important factors than official trade barriers in regards to poor US export performance into Japan.

Leave a Reply

Your email address will not be published. Required fields are marked *