Impacts of East Asian Large-Scale Trade Surplus - PowerPoint PPT Presentation

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Impacts of East Asian Large-Scale Trade Surplus

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But with risk i us = i Japan + positive risk premium, i Japan is driven to zero. ... Domestic Macroeconomic Conditions dictates the capital flows ... – PowerPoint PPT presentation

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Title: Impacts of East Asian Large-Scale Trade Surplus


1
Impacts of East Asian Large-Scale Trade Surplus
Eco 3370 PPP2
  • J.D. Han

2
Idea
  • Under the gold standard system, where the amount
    of bullion is fixed in the short-run, a country
    (A)with trade surplus gets inflation, and a
    country(B) with trade deficits gets deflation.
    Thus, As exports falls and Bs exports rises. A
    and B will go back to trade balance.
  • Under the current international monetary
    system(U.S. dollars as the Key currency Fixed
    FOREX system with Sterilization Policy) and , A
    can have trade surplus with B running trade
    deficits almost indefinitely.

3
Historically
  • In the Late 18th Century
  • -U.K. had a big trade surplus with the world
  • -Non deflationary to other countries
  • as U.K. invested surplus funds in the world

4
  • 1870-1890s
  • The newly developing U.S. and Germany had a huge
    surplus
  • They were highly deflationary to the rest of the
    world as surplus was used for domestic investment

5
China in the 18-19th Century
  • China had a huge trade surplus with European
    countries.
  • It was deflationary as a very little fund from
    trade surplus went back to the world.

6
Post World War II
  • No longer Species currency system
  • Change into the Key Currency System

7
1970s and 1980s
  • Japan had a huge Trade Surplus with U.S.
  • Somewhat deflationary
  • U.S. could still run deficits and print liquidity

8
Eventually, Japan
  • Developed
  • Conflicted Virtue by Ronald McKinnon
  • - with anticipated appreciation of Yen, the
    domestic interested fell to zero.
  • Why? In Portfolio substitution theories, i us
    i japan with no risks. But with risk i us i
    Japan positive risk premium, i Japan is driven
    to zero.

9
China after 1995
  • China has become the factory for U.S.
  • China sends Capital back to U.S.

10
Key Issues of Current International Financial
Flows between East Asia and U.S.
  • How did it start? By nature or by design?
  • - J.D. Hans short paper on the
    historical perspective of the U.S. Supply Chain
    in East Asia
  • 2) Domestic Macroeconomic Conditions dictates
    the capital flows
  • - U.S. domestic macroeconomic conditions (
    relatively Strong Domestic Investment) dictates
    U.S. trade deficits and China and East Asian (
    relatively Weak Domestic Investment) happens to
    be the best fitting partner
  • - FOREX issues are red herring
  • Next Powerpoint
  • 3) Still there are some Expected Problems
  • -Ronald McKinnons paper on the Conflicted Virtue
    of China
  • 4) Impact of Current World Recession
  • - Erturks Paper on the Changed U.S.
    Absorption Capacity of Chinese Capital

11
Conflicted Virtue
  • The current international division of labor
    between China and U.S. has worked on the premise
    that the Chinese do not fully trust the Chinese
    currency (or investment in China) Domestic
    investment or holding Yuan is an imperfect
    substitute for investment in U.S. dollars.
  • There is a danger of Conflicted Virtue as the
    stability of the Yuan currency increases
  • If C.V. happens, then there will be
    Liquidity Trap in China -gt Monetary policy would
    not work.
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