The PRC-India Trade Imbalance, c/o 'Shamsung'

Spot the fakery

When it comes to globalized commodities, you probably cannot outdo Chinese no-name electronics as PRC-sourced fakes are the wares of street hawkers the world over. Hence, the 'Shamsung':

Made-in-China products are also flooding into Indian markets served mainly by small and midsize local companies [read: mom-and-pop shops given limited inroads made by retail trade liberalization]. The deluge of Chinese imports is beginning to further strain a tense bilateral relationship, which is traditionally prickly because of a territorial dispute.

Indian consumers are for now embracing cut-price Chinese offerings. That may not be the case if they find themselves out of work because of relentless competition from low-cost manufacturers over the border.

Take a walk through an Indian market and the scale of the issue becomes clear. Fake Chinese cellphones are clearly visible in the sprawling black markets of Mumbai, the country's biggest commercial center. Legions of vendors spend their days selling counterfeit Samsung Electronics and Taiwan's HTC phones. Cheaper look-alikes can also be bought with little fuss. Hordes of eager shoppers bustle through the warren of cramped shops, haggling over prices.

That's at a local level. At the international level, it all adds up to an overwhelming trade balance in favor of China over India. Where have we heard this story before?

Indian companies typically import nonbrand products from China and sell them in India at extremely low prices, a senior executive at a Japanese appliance maker said. India's smartphone market is a microcosm of what is going on at a macro level. The country runs a chronic and growing trade deficit with China.

In the fiscal year through March 2013, India exported some $13.5 billion worth of goods to China and imported $52.2 billion's worth. The government in New Delhi wants to narrow the trade gap. Consumers in India benefit from the bargains, but the trade imbalance is a source of economic tension between the countries.

It's funny how the Chinese are now aping Koreans when the latter were famous for making fake European leather goods for the longest time. Meanwhile, Chinese firms don't particularly care who they are copying as long as they are able to sell their fakes. If imitation is the sincerest form of flattery, then South Korea has gone a long way. At any rate, the PRC-India trade imbalance isn't exactly improving as a result.

If Obamacare reduces labor supply, will it raise wages?

In a couple of recent articles written by smart economists, I have read the following claim: CBO says the incentives in the Affordable Care Act will reduce labor supply. If it does, then real wages will increase.

That sounds like reasonable, textbook economics. But I don't think it is true. The problem is that the logic is entirely partial equilibrium. It is holding everything else constant. But that is surely not right in the long run. Lower labor supply means lower income, which means lower saving, which means lower investment, which means a lower capital stock, which means lower productivity, which means lower labor demand.

Perhaps the easiest way to think about this issue is in the context of a Solow growth model. In the Solow model, the steady-state real wage is a function of technology, the saving rate, and the population growth rate. If labor supply per person suddenly falls by, say, 2 percent and stays there, the real wage will rise initally, but it will eventually return to its former level. Steady-state income per person falls by the full 2 percent.

One effect that might occur is a change in the composition of labor income. If the Act reduces labor supply primarily among the low-skilled, while not having that effect among the highly-skilled, then we might get a change in the relative wages of skilled and unskilled. But an overall increase in real wages seems unlikely.

VW and 'Unionization' of Southern US Car Plants

There's much interesting politicking going on at the moment among Southern states in the US Sun Belt hosting foreign automobile plants. For a very long time, they have been drawing Japanese and European carmakers keen on avoiding the hassles American unions--in particular, the United Auto Workers--have introduced for their American counterparts in the Rust Belt. Large financial incentives for locating in the Sun Belt have certainly lured them there, too.

Now, however, one of the European biggies in Volkswagen seems to be encouraging the formation of labor representation in its plant in Chattanooga, Tennessee. One of the longstanding complaints about German firms is that while labor representation is considered important alongside capital owners and government in setting industrial policy, they are marginalized Stateside. After years and years, it seems Volkswagen is intending to do something about matters in introducing labor representation. However, it is not exactly the same sort of arrangement American unions are familiar with, but is intended to resemble the German variant of works councils:

This would also be something new for the United Auto Workers. They wouldn't have the same relationship with VW as they do with Chrysler, General Motors, and Ford. Rather, the idea is to create something called a "works council," which are widespread across Europe and enjoy tremendous influence over how plants are run. In America, that kind of body can't be established without a union vote -- but crucially, the works council would be independent of the union, meaning the UAW would give up some control as soon as it gained it.

While the details of the arrangement would be ironed out after the election, works councils -- which are elected by all workers in a factory, both blue and white collar, whether or not they belong to the union -- usually help decide things like staffing schedules and working conditions, while the union bargains on wages and benefits. They have the right to review certain types of information about how the company is doing financially, which often means that they're more sympathetic towards management's desire to make cutbacks when times are tough. During the recession, for example, German works councils helped the company reduce hours across the board rather than laying people off, containing unemployment until the economy recovered.

In other words, the German setup is not meant to be antagonistic since works councils are involved in making management-related decisions (especially those dealing with labor, obviously). Still, others in the Sun Belt do not seem to make this distinction, thinking that VW is "unionizing" Southern plants and that there is a domino effect that may follow, making the region unattractive to labor-averse foreign firms. So, plans are afoot among Tennessee lawmakers to roll back concessions granted to union-coddling carmakers like VW:

On Monday, state Republican leaders accused Volkswagen of supporting the UAW and they threatened to withhold any tax incentives for future expansion of the three-year-old assembly plant in Chattanooga if workers vote to join the UAW.

"Should the workers at Volkswagen choose to be represented by the United Auto Workers, then I believe any additional incentives from the citizens of the State of Tennessee for expansion or otherwise will have a very tough time passing the Tennessee Senate," State Sen. Bo Watson, R-Chattanooga, said in a statement sent to the Free Press.

A worker opposition group called Southern Momentum echoed that position in a statement. "Further financial incentives — which are absolutely necessary for the expansion of the VW facility here in Chattanooga — simply will not exist if the UAW wins this election," Maury Nicely, a Chattanooga labor lawyer representing Southern Momentum said.

Take that, VW pinkos! Actually, VW is currently in need of worker support at a time when sales Stateside are slipping--blame the weak-selling US-only Passat that trades European sophistication for American softness. VW is banking on the appeal of offering the opportunity to make these works councils to keep workers on their side.

Will it work? We'll know by Friday.

UPDATE 1: Hysterics from (mostly Republican) politicians aside, the vote does not seem to matter all that much to anyone else.

UPDATE 2: The vote lost anyway--and not by a small margin. So much for the renaissance of organized labor.

The Economics of Downton Abbey

From The Washington Post.

Unlike US, Why EU Doesn't Hurl Expletives at Russia

I strongly feel that the Sochi Olympics is a giant feast for the Western media to rip Russia to pieces. And as such, any detail, any mistake, anything negative at all no matter how small will be the centre of attention – and all the positive things will go unnoticed - Yulia Ivanova, Russian expat in London

Unfortunately for the Sochi Olympics, it seems most of the entertainment so far is not of the sporting variety. To no small extent, this is the Russian host's fault and not of Western media. While parading their (comely) female athletes in scantily-clad poses is not especially eyebrow-raising in this day and age, I think they would capture the world's attention more if they, er, actually managed to win some medals at this stage. They're athletes, right?

Another sideshow of Olympic dimensions has involved Ukranian President Viktor Yanukovych meeting his Russian counterpart Vladimir Putin at Sochi. Having eased out his rabidly pro-Russian Prime Minister Mykola Azarov in a bid to appease protesters, Yanukovych has incurred Putin's wrath and, as a result, further Russian emergency aid for Ukraine is currently in limbo. Before he left for Russia, American  officials now famously met with Yanukovych in Ukraine. And, unwisely using unencrypted phones, we have a recording of the now-infamous quote where Assistant Secretary of State Victoria Nuland says the US should ""f--k the EU" to the State Department representative in Ukraine. Whether Russia deliberately snooped on the conversation or simply pointed out that it was online, I suspect they are happy it exists. German Chancellor Angela Merkel is claming outrage over the statement. Divide and conquer (Westerners) and all that jazz.

It is perhaps unfortunately common that American "diplomats" pepper their conversations with foul language. Ask Susan Rice. Why is it though that we never hear of, say, EU officials expressing their frustrations using foul language?

(1) The EU is a multinational enterprise. Their officials are not as comfortable using expletives with Europeans of other nationalities who may misunderstand their intended meaning. Americans are comfortable using foul language among themselves since the intended meaning comes across clearly, having a common language and culture. European diplomats, however, must deal with far more linguistic and cultural diversity, and the chances of offending other Europeans is much greater. So, to be on the safe side, they stick to civilized communications even during private correspondence.

(2) Another obvious political economy consideration is that Western Europe is far more reliant on trade with Russia than the United States is and thus cannot afford to be so gung-ho on Russia. While it is busy diversifying its energy supplies, much of the EU is still dependent on natural gas being supplied by the giant to the east:

Of the EU's current annual demand for 485 billion cubic metres (bcm) of gas, Russia supplies some 150 bcm.

Demand could rise to 585 bcm by 2023 with the Russians supplying as much as 175 bcm, according to Reuters calculations based on data from governments and energy companies, as well as input from research firms and consultancies. This means that the amount of gas from Russia is not only set to rise, but Russia's share of Europe's gas market will remain stable around 30 percent.

So, don't hold your breath waiting for Baroness Ashton telling EU diplomats to "f--k Russia over Ukraine." Otherwise, do enjoy the Olympic sideshow. It didn't cost $50 billion to stage and yet it is providing superior entertainment so far.

Will US Allow Lenovo to Buy Parts of IBM & Google?

Does it come with PRC minders listening in as a standard feature, NSA style?

Call it Reds Under the Beds, Cyber Edition. The supposed land of free trade has customarily thrown significant roadblocks in the way of Chinese firms signaling their intent to purchase US tech-related firms on "national security" grounds. The reasoning usually goes like this: Chinese firms trace part of their ownership to the PRC itself, hence there is a threat that their political overlords will ask them to incorporate spying apparatus in the electronics they sell Stateside. It's a lot of "could bes" and "what ifs" when, in reality, we know that the Yankees are no slouches on surreptitiously gathering information on everyone else. There are no hypotheticals there since US spying happens all the time on friend and foe alike.

At any rate, Lenovo--which famously purchased IBM's personal computer business sometime ago--is now looking to buy Big Blue's server business. What's more, it is also looking to purchase Google's Motorola (remember them?) cell phone unit. IBM is looking to concentrate on services. By divesting the server business it will have a negligible interest in selling the "International Business Machines" it stands for. Meanwhile, Google has not exactly revived the moribund Motorola name to compete with the likes of Apple and Samsung. So, on the shopping block both go.

Following earlier,  harrowing experiences of fellow Chinese companies Huawei and ZTE dealing with the multi-agency Committee on Foreign Investment in the US (CFIUS) that looks into foreign investment with "national security" implications, Lenovo is hiring high-priced talent to avoid such entrapment for both prospective deals.

Lenovo Group Ltd. has turned to national security insiders to win U.S. approval to buy Google Inc.’s Motorola Mobility phone unit and International Business Machines Corp.’s low-end server business, people familiar with the two deals said. 

The world’s largest personal-computer maker hired attorneys at Steptoe & Johnson LLP who held positions at the Central Intelligence Agency and the Homeland Security Department to guide its Motorola review through a key interagency panel, one of the people said. Covington & Burling LLP partners David Fagan and Mark Plotkin are representing Lenovo in the IBM server deal, according to another person familiar with the matter...

Steptoe will guide the Motorola review through the Committee on Foreign Investment in the U.S., or CFIUS, one of the people said. Partners Stewart Baker, a former senior official at Homeland Security, and Stephen Heifetz, who served in the Justice Department, Homeland Security and the CIA, are advising China’s Lenovo on its purchase of Motorola Mobility.

Covington’s Plotkin represented IBM in the $1.25 billion sale of its personal-computer division to Lenovo. He leads the firm’s national security and defense industry group, according to his biography on the law firm’s website.

In other words, Lenovo has added to the payroll those who would likely have been on the CFIUS at an earlier time to see its acquisitions push through. Lenovo has the advantage of having gone through the CFIUS process before. What's more, the businesses it intends to buy are supposedly not "mission critical" in undergirding the US telecoms infrastructure:

Lenovo’s purchase of IBM’s PC business has already been vetted by U.S. officials, and the company was cooperative and open during that investigation, Lewis said. In addition, they’re buying low-end, consumer-oriented businesses.

“If you had to pick a Chinese company that wasn’t going to run into trouble, it would be them,” Lewis said. “This is a pretty vanilla deal, as opposed to the backbone telecom products, which have always been considered a strategic industry. No one considers servers or handsets strategic.” 

I do hope so, but I somehow think that US lawmakers will make a big stink of both either way to score political points. Remember, too, that Lenovo tried to purchase Canada's BlackBerry late last year--a seemingly innocuous purchase along the same lines as Motorola--but was thwarted by the Canadian government:

Beijing-based computer manufacturer Lenovo Group Ltd. actively considered a bid for BlackBerry Ltd., but the Canadian government told the smartphone company it would not accept a Chinese takeover because of national security concerns, according to sources familiar with the situation.

Ottawa made it clear in high-level discussions with BlackBerry that it would not approve a Chinese company buying a company deeply tied into Canada’s telecom infrastructure, sources said. The government made its position known over the last one to two months. Because Ottawa made it clear such a transaction would not fly, it never formally received a proposal from BlackBerry that envisioned Lenovo acquiring a stake, sources said.

No matter how hypocritical or far-fetched, racist-protectionism persists among North Americans.

Rebuilding the USSR, Retaking the Commanding Heights

The stuff of Putin's fondest dreams

With the 2014 Winter Olympic Games kicking off in Sochi, Russia, the world's attention has naturally focused on that country. The story of Boris Yeltsin handing over large swathes of Soviet-era industry to so-called "oligarchs" who purchased these interests at fire sales prices is well-known.  Pressured to privatize state-owned firms by the West, Russian authorities unloaded energy and raw material concerns quickly and irrationally.

In Russian President Vladimir Putin's second term beginning in 2012, earlier nostalgia for Soviet strength from Yeltsin's handpicked successor has turned into a redoubled effort to reconsolidate state control over the aforesaid industries. In particular, the efforts of Igor Sechin, one of Putin's leading operatives, is intriguing in terms of reconstructing the "commanding heights" of state-controlled industry in the 21st century:

When Igor Sechin was working as President Vladimir Putin’s deputy chief of staff a decade ago, visitors to his Kremlin office noticed an unusual collection on the bookshelves: row after row of bound volumes containing minutes of Communist Party congresses. The record stretched across the history of the party and its socialist predecessor -- from the first meeting in March 1898 to the last one in July 1990, a year and a half before the Soviet Union collapsed...

Sechin regularly perused the documents and took notes, says Dmitry Skarga, who at the time was chief executive officer of Russia’s largest shipping company, OAO Sovcomflot. “He was drinking from this fountain of sacred knowledge so that Russia could restore its superpower status and take its rightful place in the world,” Skarga says.

Sechin’s back-to-the-future fascination with his country’s communist past is something he shares with Putin, who, soon after coming to power in 1999, restored the music (though not the lyrics) of the Soviet-era national anthem and later described the collapse of the USSR as the greatest geopolitical catastrophe of the 20th century. 

Economic efficiency? Bah! Competition serving the consumer interest? Getouttahere! Enough Western nonsense; it's back to the "golden age" of Uncle Joe:

Sechin is the leading exponent of Putin’s stated determination to restore the state’s role in the Russian economy. Putin used Rosneft, through its acquisitions, to return Russian oil to state control. The company, 69.5 percent government owned, controls about 40 percent of Russia’s crude output. In a similar vein, Putin re-established majority state control of natural gas-exporting behemoth OAO Gazprom. The company had been privatized in the mid-1990s under his predecessor, Boris Yeltsin, cutting the government’s stake to 41 percent.

To develop high-technology industries such as armaments and pharmaceuticals, Putin created Rostec, a state corporation that encompasses 663 companies employing 900,000 people, or 1.2 percent of the entire Russian workforce. He expanded state-run banks OAO Sberbank and VTB Group, whose dominance in retail banking has edged out foreign rivals such as HSBC Holdings Plc and Barclays Plc.

Sechin declined requests to be interviewed or to answer written questions. In a telephone interview on Jan. 20, Putin spokesman Dmitry Peskov said of Sechin: “Sechin is a believer in the role of the state in his economic philosophy while at the same time not excluding a free-market approach. And he is firm in pursuing his viewpoint.”

Putin and Sechin see themselves as being in the, ahem, vanguard of rolling back admittedly rigged experiments in free market economics post-Soviet Union. While the West looks on with no small measure of dusgust and horror, you do have to wonder whether the era of oligarchs--coinciding with liberalization, deregulation, and privatization--did Russia any favors. By botching the former Soviet Union's transition to modern-day Russia, Westerners probably sowed the seeds of doubt which have reached their fullest expression in today's Putinism.

As the saying goes, you reap what you sow.

UPDATE: Dig the gulag-standard digs for Sochi visitors.