When Supply Creates Demand: Yellen's Errors Of Omission


(MENAFN- Asia Times) US Treasury Secretary Janet Yellen on April 8 warned China that rising investment
in new industries will lead to“significant risk to workers and businesses in the United States and the rest of the world,” adding that China“is now simply too large for the rest of the world to absorb this overcapacity.” Secretary Yellen said:

This sweeping statement raises three questions:

  • Is the problem over investment
    in China, or under investment
    in the United States and other Western countries?
  • What effect does greater capacity in China have on demand for industrial products, that is, is it possible that an increase in supply
    can cause an increase in demand?
  • Who is buying more Chinese products? Are Americans buying more Chinese goods at the expense of their domestic industry, or are Chinese products sold to countries that do not have competing industries?

There aren't sufficient data to provide definitive answers to these questions, but there is enough evidence to indicate that Secretary Yellen's analysis is oversimplified at best and distorted at worst.

US manufacturing employment is virtually unchanged from May 2019 (12.96 million in March 2024 versus 12.8 million in May 2019). The Fed's industrial production index is unchanged.

Except for subsidized investment
in semiconductor fabrication plants, industrial investment
has been weak. American manufacturers' orders for nondefense capital equipment excluding aircraft stood at $37.8 billion 1982 dollars in January 2019, but fell to $34.2 billion in January 2024, a decline of almost 10%. Investment in manufacturing structures in 2017 dollars in the fourth quarter of 2023 was $140 billion, compared with $185 billion in the first quarter of 2019.

Meanwhile the US trade deficit in goods rose to $92 billion seasonally adjusted for the month of January 2024, compared with a deficit of $72 billion in January 2019. For some reason, Americans chose to invest less in manufacturing at home and to buy more manufactures from other countries.

During this period America imposed a 25% tariff on more than $200 billion of Chinese import
s. Import prices (before tariffs) for Chinese goods rose slightly between January 2019 and January 2024. Meanwhile, import
s of goods from China as reported by the US statistical agencies fell from $41 billion in January 2019 to $36 billion in January 2024.

It is hard to blame increased import
s of Chinese goods for the decline in US manufacturing investment
and the increased dependency on foreign goods during the past five years.

Chinese import
s in the past surely contributed to a loss of US manufacturing jobs. But, as noted, American import
s from China fell during the past five years. These are long-term trends that were visible long before the emergence of China's EV industry.

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Asia Times

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