The US needs to produce and save more. It needs to stop living beyond its means.  It must rebuild an economy based on producing internationally-valued output rather than operating as a giant casino with far too many spiv schemes for achieving instant wealth via a bloated finance sector – an economy should not be spending 8 per cent of its productive resources on ‘innovative’  finance.   As many have pointed out the US financial system needs to be regulated.

In the days when macroeconomic theory seemed simpler than in its current poses the effect of maintaining fixed exchange rates was seen as equivalent to flexible exchange rates in the long-run because accumulating foreign reserves  would drive up prices in the economy with surpluses and reduce them in countries with deficits thereby automatically eliminating trade deficits – the price-specie-flow mechanism.   This isn’t happening presumably because of the Chinese lending – or is my accounting here in error? This is a question to macroeconomics experts.  The US gains cheap consumption goods from China which it funds, in part, by loans from China which it then threatens to at least in part repudiate.

US commentators, including those on the left, have a nerve criticizing Chinese policies in many areas.  On climate change it is difficult for the US to criticize China when the US itself, a wealthy country, has done so little and China is already doing so much.

My guess is that for all the posturing about refusing to enter into a program for agreed-on-cuts that China and India’s strategic position on climate change is very weak.  These countries will suffer far more serious costs as a consequence of global heating than will the US or Europe.  Maybe they see the prospect/possibility of the Waxman-Markey Bill being defeated in the US Senate and are terrified.   They would then receive almost no rich country charity  (sorry, ‘compensations’) and would bear the worst effects of climate change.  Presumably the US is stressing these obvious facts to large developing countries right now.  All the skillful bargaining in the world cannot change the structure of the strategic payoffs in this countdown to Copenhagen

Both India and China will make ‘voluntary’ cuts that are backed by law (not very voluntary!) to try to force the hand of the US. Many of these ‘voluntary’ cuts are dressed-up ‘no regrets’ options (improving energy efficiencies,  new building codes, renewable energy targets). In the end this will not convince anyone. Serious steps must be undertaken to trim their long-term – and increasing – dependence on coal.  The details of the specific Chinese/Indian and the consequent US response will be interesting to observe over the next few days.

Note how China Daily reported the claims. Here it is agreed that no evidence has been produced to support the preposterous Chinese assertions – how could it?. Ominously however this official newspaper account extols the need to protect state secrets in the commercial area.   

This is ominous news for those seeking to further their commercial relationship with China.  While China has asserted the need for ‘non-interference in its internal affairs’ with respect to its legal system this will not be accepted by any fair-minded individual. Mr. Stern Hu has been arrested without charges being laid and without the opportunity to seek legal representation. Moreover, the Chinese media and the Chinese Foreign Ministry have asserted his guilt prior to any trial being held. Is this a legal system that deserves respect?

Given its size China can be a force for good or evil in the world. The developed world derives many benefits from China achieving its development goals but when China acts as an intolerant, bellicose child who has suddenly come into newfound wealth it does not send out good signals.  Moreover, these actions harm both China and China’s suppliers such as Australia.

It has been a bad week for China in Australia with Chinese diplomats and angry Chinese demonstrators attempting to suppress the participation of Uighur leader Ms. Rebiya Kadeer in a Melbourne film festival as well as objecting to a screening of a film on her life.  Australians naturally resent the attempts by an authoritarian regime to censor views in Australia. That is not saying that Ms. Kadeer has a monopoly on the truth but she has the right to exposit her views.  Particularly when those opposing her are engaging in the types of shenanagins we see with Mr Hu.

It is natural for businesspeople in the west to speculate that the arrests are related to the failure of the Chinalco bid for joint ownership of key iron ore assets owned by Rio. Speculation is also rife that the arrests are related to the apparent failure of Chinese steel producers to secure greater price discounts in the current bargaining round with both BHP-Billiton and Rio.  This is just speculation which is why the reasons for the arrests must be clarified.

As I argued earlier the reason that the Australian Government delayed approval of the Chinalco bid was unrelated to political considerations about the conjectured role of the Chinese Government.  It was probably just due to an assessment of Australia’s national interest.  Australia has some monopoly power in iron ore markets and China, because it is the major purchaser of Australian iron ore, has monopsony power. The resulting bilateral bargaining situation would move against Australia’s interests were a major customer to gain control over supply.

All the evidence since suggests that is an accurate way of understanding the situation.  China is threatening anti-trust action against BHP-Billiton and Rio Tinto in  China and there is a concerted effort to make sure that China presents a united front in bargaining over iron ore prices.  Indeed one speculation about the reason for the arrests is that individual steel makers in China attempted to do separate direct deals with the ore suppliers (see the update below).

The arrests however may add credibility to the initial hypothesis that political factors do make Chinese investments in Australia undesirable. This would be mutually disastrous given the massive current scale of such investments. In the long-term Australia and China have too many coincident economic interests to prevent a good economic relationship but the current events are causing real damage.

Update: I have just received the China Daily which sets out more specifically the Chinese concerns:

“Stern Hu, a general manager for the Chinese operation at Rio Tinto’s iron ore division, as well as three other employees at the mining company were detained July 5 for alleged spying. Their acts caused huge losses for China’s economic and security interests, said Qin Gang Thursday.

During iron ore price negotiations that China held earlier this year with Rio Tinto, Vale of Brazil and BHP Billiton of Australia, Hu and the three Rio Tinto employees procured national secrets by bribing insiders with Chinese steelmakers, according to Shanghai’s State Security Bureau.

Though authorities have not revealed details of the State secrets and how they affected the price talks, the 21st Century Business Herald cited an anonymous source close to the issue that Hu was in close contact with a senior executive from the Shougang Group, the sixth largest steelmaker in China.

The executive, Tan Yixin, is head of the export and import business of iron ore for the Shougang Group. He was arrested on July 7 for commercial crimes”.

 

This is how the China Daily reported it – the video coverage is graphic.

This is how The Times saw it. Information flows are being managed rather than eliminated.

More to come I am certain.

Update: A major concern in China at present is the reaction of the western media to these events.  At least 156 Han Chinese were killed in these events and all of them seem to be total innocents – for the most part poor people seeking to provide a better life for their families in this underdeveloped part of China.  This should not be foregotten. Moreover, when angry Han sought to take violent revenge against the Uighur they were prevented from doing so by the military – this is hardly evidence of ‘ethnic repression’. Minorities in China are given a special priviledged status in many respects – they are exempted from the one-child per family policy for example. Some of the western critics of China seem to be asserting that murder of innocents is acceptible provided they are Han Chinese.

But obviously not – others have very different views.  The ANU’s Peter Drysdale provides an alternative viewpoint on the East Asia forum.

According to Peter the main issue is politics not economics – the Chinese will retaliate for the rejection of the Chinalco bid and we have damaged Chinese ‘generosity’ towards Australia’s many ‘failings’ as a nation, a fact that will impede future relations to the detriment of both countries.

In a private communication Peter rejects my claim that – apart from transport issues – there is any significant monopoly power in these markets and argues that my viewpoint is inconsistent with “Applied International Resource Economics” 101.  

I remain however unrepentant in my view that Australia should have a clear ‘national interest’ argument for approving foreign investment proposals and that in this case there was no sensible case for allowing the Chinalco move to proceed. Whether Kevin Rudd skilfully delayed approval until the Chinalco move failed or whether, as Rio stated, it simply changed its mind given a change in market conditions we will not know for 30 years until Cabinet papers are distributed.   But the shift was advantageous to Australia.

In response to Peter’s claims I argue as follows.

On the issue of providing evidence for monopoly power. The massive BHP profits for a start ($13.7b in 2007), the annual negotiations over iron ore and coal prices (contract iron ore prices rocketed 85% in 2008/09) and the enormous market share China takes from Australia suggest this is not a price-taking industry where prices are driven to the marginal cost of extraction.  There will be additional transport economies in the Pilbara resulting from the merged operations but essentially a Rio-BHP unit in the north-west will have enhanced market power which is the reason their share prices both rose so strongly after the announcement.  They rose when they saw the Chinalco deal was not going through.

Immediately too after the announcement – and again in today’s SMH – the Chinese side started moaning about the ‘monopoly power’ of the merged BHP-Rio entity. They saw the monopoly issue clearly and I am surprised that Peter does not. The huge set up costs in terms of providing transport and port infrastructure as well as the massive concentration of iron ore resources in Australia’s north west make it most unlikely these industries are contestable.

Why would Australia transfer ownership of key resources to a foreign monopsonist purchaser of these resources?  This is the possible reason Rudd went slow on the Chinalco bid and rightly so.

Having lived in Asia for a decade I constantly experienced attempts by local civil servants and politicians to put Australians ‘on the back foot’ by drawing attention to discriminatory immigration policies and alleged xenophobia.  This is pure hypocrisy and should not be taken seriously, and to our national disadvantage, in disputes over foreign investment approvals or trade.   The argument is a negotiating tactic by Asian governments that does not reflect reality unless it is misguidedly taken seriously.

China will be disappointed in the failure of the Chinalco deal but this has nothing to do with a failed ‘love affair’ with Australians. The Chinese sought to demolish Rio’s price-setting power in iron ore and coal markets and to thereby deflate any market power BHP-Billiton might have.  China is acting in its self-interest and should do so. So was Australia which was not being xenophobic or anti-Chinese at all.  It was simply acting in its national self-interest.

On the issue of long-term retaliation by the Chinese against Australia because Australian firms seek to exploit monopoly power in resource markets – it needs to be understood that possible Chinese retaliation is a commercial reality that will need to be internalised by Rio-BHP.  The most likely retaliation is that China will seek alternative suppliers. Then Rio-BHP may need to levy ‘entry forestalling’ prices if it is to best capitalise on its market position.  

I will start a stay of a month or so in China in a few weeks time and am trying to accumulate some information on Chinese climate policies.

Some earlier posts I have made on this topic include this, this and this.

There is useful information at the Pew Centre website.  It contains links to other important material.

Here is an important June 2007 statement from the Chinese National Development and Reform Commission.

This is China’s White Paper: China’s policies and actions on climate change that was released late in 2008 by the State Council Information Office.

This is China’s declared position on the forthcoming Copenhagen climate change conference. That’s the target of the work I wish to do.

Here is some (fairly) vague material on the current state of US-Chinese negotiations.

This is an interesting piece by William Chandler on ‘Breaking the US-China Suicide Pact’ on climate change.  Chandler has also compiled this piece on ‘Financing Energy Efficiency in China’.

Here is an impressive overview of the Copenhagen negotiations and the problems these negotiations will face by John Whalley and Sean Walsh. It is subtle – superficially fairly bland but scratching for basics.

This is an interesting piece by reader MikeM (thanks Mike) on the way the Chinese are leading the way in carbon-efficient coal-fired power generation.  The piece reminded me of a related recent article I read in the NYT on Chinese leadership of the electric car industry.

The ANU’s Shiro Armstrong put me onto this piece on the East Asia Forum Blog and a very interesting (though short) piece by  Youngsheng Zhang on the analytics of the Chinese approach. 

This NYT article summarises the current state of negotiations between China and the US.

Excellent articles from Die Spiegel on the Chinese and US policy positions.

I am trying to put some more material together on Chinese (and necessarily US) climate change policy issues over the next week and will add them to this post as I do without comment.  Suggestions welcome.