EclectEcon

Quite frankly, with unemployment rates at or near 60-year lows in the US and Canada, it is hard for me to get worked up about the transfer of manufacturing output from North America to the Asian economies. It looks to me as if we are amazingly flexible and resilient, for the most part, as our economies adapt to the changes in trade and to the reflections of different input prices in different economies. From Cafe Hayek,

From Robert Samuelson's column in [the] Washington Post:
From 1998 to 2007, total non-farm payroll employment [in the U.S.] rose 12 million, and unemployment averaged only 4.9 percent -- despite the 4 million lost factory jobs. In that period, U.S. manufacturing output rose 22 percent.

More evidence of the sectoral shift comes from Steve Poloz:

Autos and parts remain the second-largest export sector for Canada, at just over $70 billion in 2007. Energy exports have leapt into first place, generating revenues of nearly $92 billion in 2007. Close behind autos is exports of services – tourism, financial services, engineering and professional services, and so on – at nearly $68 billion.

Russ Roberts at Cafe Hayek has written one of the best, most sensitive (dare I say "beautiful"?) pieces on international trade that I have read in long time. Prompted by a book by and interview with his colleague and co-blogger, Don Boudreaux, Russ writes,

[T]here's no denying that it's very tough on a person who has invested most of his life in a particular skill to suddenly find that there's no demand for that skill. Yes, it's the price of progress and it's a price worth paying. Yes, it's not particular to foreign trade, as Don points out, but is the result of all kinds of economic change. But there is something deeply poignant about it, nevertheless.

... [T]he real consolation for that worker who loses his job and struggles to find another that is as satisfying is knowing (if he knows any economics) that his children and grandchildren will lead better lives because we tolerate economic change.

But these snippets do not do his posting justice. Please, please go read the entire thing. It'll take only a couple of minutes, and it will be well worth your time.

Steven Landsburg had an op-ed in the NYTimes today arguing that we have no moral obligation to compensate auto workers (or other people) for the losses they suffer as we reduce trade barriers and subject their output to increased global competition. It is very good. Let me add a few additional points:

• If it's okay to compensate/retrain/etc. auto workers who lose their jobs (more than we compensate/retrain/etc. other workers who lose their jobs for whatever reason), shouldn't we also compensate the stockholders in the auto companies for their losses as well? What about the poor pensioners or widows and orphans who left all their wealth tied up in big-3 auto stock? Don't we care about them?
• How about this: we compensate them now for their losses if they compensate all consumers who at any time in the past suffered losses because they had to pay too much for their cars as a result of US tariffs and non-tariff trade barriers?

I get the sense that everyone but economists thinks trade is bad. Oh, to be sure most people like the lower prices we pay for so many things as a result of trade. But despite the low unemployment rates in North America, it just seems to me that most North Americans think trade is bad because it steals jobs from their fellow citizens.

I know that sense is incorrect in some ways; otherwise, how would we have gotten such phenomenal trade liberalization over the past two decades? And yet my sense is not far off the mark. Ben Muse cites a recent poll in which 60% of the respondents agree with anti-free-trade statements.

U.S. voters rank trade issues relatively low on the list of things they're worried about, but they don't think foreign trade has been good for the U.S., suggests an early November poll of registered voters conducted by NBC News and the Wall Street Journal

Perhaps the next Nobel prize in economics should go to someone who comes up with a presentation of the gains from trade that is super-effective in countering the anti-trade rhetoric of special interests. So far economists have not succeeded with the general public.

Former Student, Mike Moffatt, writes at About.com: Economics. In a recent piece, he explained the economics of tariffs. The article explains why countries impose tariffs, it goes through the costs and benefits of having tariffs (concluding that generally, from a theoretical perspective, the costs outweigh the benefits), and it reviews the empirical literature that confirms the theoretical results. Here is his conclusion:

The gains from tariff policies are a lot more visible than the losses. You can see the sawmills which would be closed down if the industry is not protected by tariffs. You can meet the workers whose jobs will be lost if tariffs are not enacted by the government. Since the costs of the policies are distributed far and wide, you cannot put a face on the cost of a poor economic policy. Although 8 workers might lose their job for every job saved by a softwood lumber tariff, you will never meet one of these workers, because it is impossible to pinpoint exactly which workers would have been able to keep their jobs if the tariff was not enacted. If a worker loses his job because the performance of the economy is poor, you cannot say if a reduction in lumber tariffs would have saved his job. The nightly news would never show a picture of a California farm worker and state that he lost his job because of tariffs designed to help the lumber industry in Maine. The link between the two is impossible to see. The link between lumber workers and lumber tariffs is much more visible and thus will garner much more attention.

The gains from a tariff are clearly visible but the costs are hidden, it will often appear that tariffs do not have a cost. By understanding this we can understand why so many government policies are enacted which harm the economy.

If one input into the production process cannot move to where it is more efficient, then others will sometimes move to it. Economic efficiency is a very powerful force.

Here is an example [h/t to Brian Ferguson]: with the crackdown on illegal immigrant labour, the land cannot move to Mexico, where the cheap labour is located. However, capital goods can move there, and that is what is happening.

Steve Scaroni, a farmer from California, looked across a luxuriant field of lettuce here in central Mexico and liked what he saw: full-strength crews of Mexican farm workers with no immigration problems.

Farming since he was a teenager, Mr. Scaroni, 50, built a $50-million business growing lettuce and broccoli in California’s Imperial Valley, relying on the hands of immigrant workers, most of them Mexicans and many probably in the United States illegally.

But early last year he began shifting part of his operation to rented fields here. Now some 500 Mexicans tend his crops in Mexico, where they run no risk of deportation.

... A sense of crisis prevails among American farmers who rely on immigrant laborers, more so since legislation in the United States Senate failed in June and authorities announced a crackdown on employers of illegal immigrants. An increasing number of farmers have been testing the alternative of raising crops across the border where many of the workers are, according to growers and lawmakers in the United States and Mexico.

This example of the Heckscher-Ohlin Theorem (some might say, in reverse) exemplifies one of the effects of the North American Free Trade Agreement. So long as there were restrictions on the importation of produce from Mexico to the U.S., it became a second-best efficiency solution for labour to migrate to the U.S. But now the combination of NAFTA and the crackdown on illegal immigration makes it more efficient for capital to migrate south of the border instead.

However, contrary to the views stated in the NYTimes article quoted above, the result is not a crisis; rather it is a move toward more economic efficiency.

There are three distinct reasons that we engage in trade:

1. Different utility functions. E.g. I have a baseball glove that is worth $80 on the open market, and you have some software that is worth $80 on the open market. We both value what we have in the sense that we get some utility from having these things, but we both would value $80 worth of other things even more. So we sell them; or we trade with each other if doing so is less costly and if we have a double-coincidence of wants. There has been no production of goods in this example, no specialization, no division of labour, no comparative advantage. All that has happened is that we have realized that we have different utility functions and that we will both increase our utility by trading, either with each other or with others in the marketplace.
   
   
2. Comparative Advantage. Even if you are better than I am at producing everything, you cannot easily be self-sufficient. And even if you could be self-sufficient, you would be better off producing the things at which you are comparatively better and trading with me (and I would be better off producing the things at which I am comparatively better). Comparative advantage can arise from different productivities in labour, land, and/or capital, even though most of the examples we present in our classes involve only labour.
   
   
3. Specialization and division of labour. Even if there are no comparative advantages whatsoever, we might find it advantageous to specialize and trade. As an example, consider this question: why don't I produce my own food (assume I have the ability and knowledge to do so, and assume those who do produce food are just as capable of being economics professors as I am)? Furthermore, why don't we all produce our own food (assuming away the comparative advantage explanation)? The primary reason for this flows from indivisibilities, economies of scale, and high transaction costs. We don't rent 15 minutes on a combine to harvest the crop from the 1/4 acre of a wheat field that we might rent.... etc. etc. because the transaction costs to capture those economies of scale are just too high.

These are three separate and distinct reasons that people trade. We emphasize comparative advantage in our introductory economics courses because that is the most difficult for us to explain and needs the most time, but the others are equally important.

For more, see this at Cafe Hayek.

Protectionists are quick to point to the 3 million or so lost jobs in manufacturing in the U.S. during the past 6 years. What they rarely point to, however, is the gain of 8 million jobs in the rest of the economy, for a net gain of 5 million jobs.

To be blunt, I think job counting is misleading. If we think the economy tends toward the natural unemployment rate, job creation and job destruction seem pretty meaningless.

That having been said, Steve Polos has a good treatment of the job creation and destruction issues:

What kinds of jobs have been created? Mostly jobs in the services sector – some 7 million of them. For example, there were 1.8 million new jobs in health care, 1.3 million in government, 700,000 in finance, 500,000 in education and 84,000 in transportation. The hospitality sector contributed 1.4 million jobs. Besides this, over 800,000 jobs were created in construction, and 100,000 in mining.

Some have responded to this analysis by claiming that the new jobs being created were of lower quality, with lower wages, than those being lost, often citing job growth in hospitality. However, the average service sector wage was only 4% below the average manufacturing wage back in 2001; and today, that gap is only 1%. This is because since 2001 service sector wages are up 21%, whereas manufacturing wages are up 17%. And construction sector wages – a common destination for displaced manufacturing workers – are about 20% higher than the average manufacturing wage. This is why total U.S. income and spending have been strong, despite the woes of manufacturers.

It must also be recognized that this restructuring of the U.S. economy did not begin in 2001. There has been a gradual but steady shift away from manufacturing and into other sectors for the past 50 years. Back in 1955, 31% of all U.S. jobs (15.5 million workers) were in manufacturing. Today, that figure is only 10.3%, or about 14 million workers. Meanwhile, the number of construction workers has risen by a factor of 2.7, and service sector workers by a factor of 3.6, in the past 50 years.

International trade is playing a key role in this story. The productivity and wages of American manufacturing workers have increased enormously over the past 50 years. Much of this has come by using international trade to make companies more efficient, offshoring low-productivity tasks and raising the capital intensity of production in the U.S. Two-way trade is more than four times as important to the U.S. economy today as it was in 1955. Lower-cost manufactured imports boost spending power in the U.S., which leads to the creation of jobs in other sectors of the economy.

Brian Ferguson at Canadian Econoview takes note of a story that carrots and other vegetables may become important in many manufacturing processes:

Can you imagine it? Driving around in cars that are eighty per cent carrot? Flying in aircraft made out of turnips?

Clearly there are policy issues to be considered here. For example, give the immense potential of curran, it'll be important that we not be dependent on foreign, and possibly hostile, producers of carrots. There will have to be Pigovian subsidies to encourage the production of curran, and indeed of carrots themselves. And since industrial uses will compete with demand for carrots for human (not to mention rabbit) food uses, we'll need a central carrot governing body to allocate the crop between the various uses. Carrots are, after all, too important to be left to the market. And obviously we're going to need a strategic carrot reserve.

There's no time to waste. We've got to hop to it. Right now.

Stephen Gordon has a good posting about job mobility, specialization, and trade between different regions, even within a country:

Canadian auto sector jobs haven't been lost - they've just moved to Alberta.

From the Toronto Globe and Mail:

Canada's economy has flourished under the North American free-trade agreement, and with the right policy moves, could repeat that experience as it deals with the trade shock from Asia, a new study suggests.

In a paper to be released this week, Royal Bank of Canada examines a wide range of data showing Canada's economic performance before and after free trade with the rest of North America.

“Canadians have prospered,” conclude economists Craig Wright and Derek Holt.

“Few countries have provided as shining an example of how to adapt and prosper in a post-freer trade world than Canada.”

But it wasn't always clear that this would be the case — something that's important to keep in mind when dealing with the intense competition from Asia these days, says Mr. Holt, RBC's assistant chief economist.

Before Canada signed on to the Canada-U.S. free-trade agreement in 1988 and the North American free-trade agreement in 1993, critics charged that Canadian production would move south, exports would evaporate, jobs would dry up, foreign investment in Canada would deteriorate, the tax base would shrink, and the restructuring would force the country into a painful and long-term funk.

Those critics were the interventionists from the NDP, and their supporters. The McDonald Commission published something like 80 or more volumes of studies carried out in the early 1980s and concluded, following research by John Whalley, Rick Harris, and others, that the net gain to Canada from moving toward freer trade would be on the order of 5 - 10%. Respectable economists knew all about these studies. The only concern at the time was how and whether to deal with displacements caused by the movement toward freer trade, and for the most part the social safety net in Canada did its job.

A recently released report from the C.D.Howe Institute decries the low levels of spending on R&D in Canada:

Despite [various forms of gubmnt] support, Canada ranks low in aggregate R&D intensity — that is, R&D as a percentage of gross domestic product. On this measure, business R&D in Canada in 2004 was 1.07 percent — below the average of 1.53 percent for OECD member countries and well below that of other Group of Seven major industrialized economies except Italy. Canada also compares poorly to Sweden, for example, which provides few direct subsidies for R&D (but has a very competitive production tax regime): business R&D as a percentage of GDP in Sweden is about double that in Canada.

What to do?

Why is this a problem? Why do anything? Canada also ranks low in the production of oranges. And relative to total GDP, Canada also ranks low in manufacturing. In these areas, we recognize, acknowledge, and accept that Canada has a comparative advantage in the production of other things. Why don't we do the same thing with R&D?

The study demonstrates that a different set of tax policies would almost surely induce more spending on R&D, and that such policies would probably be efficient. But maybe, just maybe, Canada should get out of the R&D business and try to free-ride as much as possible on the R&D carried out elsewhere. And even if Canada is unable to free ride on the R&D of others, maybe we should import rather than produce our R&D.

Whatever your reaction to this, please do not give me the tired song about how Canada needs to support R&D to maintain its competitive edge and to keep our educational system at the forefront of knowledge. We don't need a number one educational system in Canada; we have almost always recommended that our top grad students study at the best schools in the US — there's nothing wrong with out-sourcing that, too.

Addendum: I am all in favour of tax policies that promote efficiency, and if such policies happen to promote more R&D spending, so be it. My objection above is to the notion that more R&D spending in Canada is, per se, a good thing.

From Paul Summerville's blog, quoting a NatPost story:

Paul Summerville, the former Bay Street economist who became a star candidate for the New Democratic Party in the last federal election, has defected to the Liberals because he is disillusioned with the NDP's economic policies.

Mr. Summerville says that if the NDP is to be taken seriously it has to accept the market economy is [not] "a necessary evil but an indispensable part of the engine of prosperity and by implication, justice. In addition, the party must accept the fact that Canada does not, and never will have the capacity to rewrite the rules of engagement in the global economy. ... Consequently, saddling the party with anti-trade, anti-corporation, anti-market rhetoric just perpetuates its marginal status at federal level.

[link via Alan Adamson, who has more].

Update: Stephen Gordon of Worthwhile Canadian Initiative is live-blogging the NDP convention. Best line so far:

The first order of business was to complain about - naturally - the order in which the resultions were going to be discussed. After 45 minutes, they still hadn't decided on an agenda, so I decided to take a short break. Then I found that I wasn't allowed back into the room, because I wasn't a party member. So I went home - to learn that the session to which I was denied access was being broadcast live on CPAC.

From the back pages of The Economist, where they publish weekly data and interesting little tidbits:

In America it is cheaper to make fuel ethanol from maize because of the high domestic price of sugar. The Agriculture Department forecasts that America will use 34% more maize in ethanol production next season, some 20% of the harvest. Prices, up by a fifth this year, look set to rise further.

And of course the reason for the "high domestic price of sugar" in the US is?
Protection of the US sugar industry.

Add to that the huge incentive US corn farmers have to support protection of the US sugar industry (plus a ban on the import of Brazilian ethanol), and it is easy to see why the international trade talks are stalled because of various agriculture policies. From Slate's Today's Papers:

The New York Times leads with the collapse of the five-year-old world trade talks. Known as the Doha round because that's the city they started in, the negotiations broke down over agriculture policies: The U.S. has been pushing for the E.U. and others to end their agriculture tariffs, with others responding that the U.S. first needs to cut back its farm subsidies--and that is a no-go.

For more on the inefficiencies of US policies regarding ethanol see here and here.

Who would think that the production of chopsticks would cause resource depletion? Apparently the Chinese gubmnt is sufficiently concerned about the possibility that they are slapping a 5% tax on the export of chopsticks. From the Trono Globe and Mail [thanks to Lori and Lisa for the pointer]:

Walk into any Japanese noodle shop or restaurant and chances are you'll be eating with a pair of disposable wooden chopsticks from China. But not for long.

In a move that has cheered environmentalists but worried restaurant owners, China has slapped a 5-per-cent tax on the chopsticks over concerns of deforestation.

The move is hitting hard at the Japanese, who go through a tremendous 25 billion sets of wooden chopsticks a year: about 200 pairs per person. Some 97 per cent of them come from China.

Chinese chopstick exporters have responded to the tax increase and a rise in other costs by slapping a 30-per-cent hike on chopstick prices, with a planned additional 20-per-cent increase pending.

The price hike has sent Japanese restaurants scrambling to find alternative sources for chopsticks, called waribashi in Japanese.

"We're not in an emergency situation yet, but there has been some impact," said Ichiro Fukuoka, director of the Japan Chopsticks Import Association.

A pair of waribashi that used to cost a little over ¥1, or about 1 cent, now goes for ¥1.5 to ¥1.7. The rising costs of raw wood and transportation because of higher oil prices have also contributed to the rise, industry officials said.

But pretty soon, some fear Japan won't even be able to get expensive chopsticks from China: Japanese newspapers Mainichi and Nihon Keizai reported that China is expected to stop waribashi exports to Japan as early as 2008.

To minimize the impact, Japanese importers now buy more bamboo chopsticks and are considering new suppliers, including Vietnam, Indonesia and Russia, said Mr. Fukuoka.

Supporters of environmental causes see the new Chinese tax as a chance to get rid of disposable chopsticks, which have been linked to deforestation and a wasteful lifestyle.

Let's get this straight. Is there a market failure that has led to the over-exploitation of forests to produce chopsticks in China? It is more likely that the only failure here is gubmtn failure, not market failure.

If forests were privately owned, the owners, anticipating future shortages, would start raising prices and reforesting the lands. But if the forests in China are state-owned, exploitation decisions are more likely to be made by civil servants who have less of a stake in maintaining the forests than would dirty rotten running-dog capitalists. So to counter the bureaucratic incentive to produce more chopsticks for export, the gubmnt has now decided to intervene some more and tax the export of the chopsticks.

And, in Japan, customers who have benefited for years from China's policy of subsidizing and "dumping" chopsticks on the world market must now face up to the reality of having to pay world prices for their chopsticks.

True story (related digression): back in the 1950s, I was in a Chinese restaurant in Los Angeles and thought it ironic that the chopsticks there had were stamped "Made in Japan". How times have changed since the opening of trade with China and with the changes in economic conditions in the two countries.

The Trono Globe and Mail reported yesterday that a resolution to the softwood lumber trade dispute between Canada and the US is near.

In a complex arrangement that would include both a quota and an export tax, Canada would agree to cap its share of the U.S. lumber market at one third, which is roughly the current level.... [and] ... the United States would lift duties on Canadian lumber and return most of the $5-billion it has collected from Canadian lumber companies.

Interestingly, this is fairly close to what Ron Wonnacott, the Canadian Dean of International Trade Economics, recommended in a confidential paper presented two months ago at The University of Western Ontario. A link to his paper is now available here.

There is one major divergence between the Globe's report and Professor Wonnacott's recommendation. The Globe says,

Canadian officials characterized talk of a deal as "speculation."

"Any numbers that might arise from this speculation can't be considered fact," said an aide to Trade Minister David Emerson Monday.

The U.S. proposal would leave many key issues subject to future negotiation.

whereas Wonnacott recommended,

While hope has recently been expressed for an agreement soon, it is very important that this be a long-term rather than a temporary solution.

Bill Sjostrom at Atlantic Blog has a wicked expose of lefty hypocrisy. He politely refers to a piece in The Guardian as a parody (but wonders whether it really is) in which the writer describes how to get the most work for the least pay out of nannies imported from Eastern Europe.

I am still laughing. This is one of the best parodies I have ever seen.

Um, it is a parody, right? The alternative is that a Guardian writer is advocating good left wing families do what they would denounce Nike for doing. Nah, the Guardian would never do that.

Beautiful.

Steve Polos has an interesting tidbit in a recent column: the countries that have had the biggest growth in trade have also been the most protectionist!

[T]he economic benefits of globalisation in terms of enhanced productivity and purchasing power are sufficient that companies will probably continue to globalise despite attempts to stop them. Certainly, companies have overlooked trade barriers in the past.

Consider the countries that have enjoyed the most international trade growth in the last five years: Vietnam, China, Russia and India. These same four countries are perceived to have the greatest visible (tariffs) and invisible (red tape, intellectual property risk and so on) trade barriers, according to a 2005 survey by the World Economic Forum. India has the highest average tariff rate at 29.1%, Vietnam is at 16.8%, Russia is at 9.9% and China is at 10.4%. It is worth noting, though, that China’s average tariff rate has declined significantly since its accession to the WTO in 2001.

The bottom line? Globalisation is to economists what gravity is to physicists – an irresistible force. One can defy gravity temporarily, at high cost. Likewise, attempting to stop globalisation will come at a high cost – potentially a trip down memory lane, to the living standards of 20-30 years ago.

Phil Miller clearly explains why the Big-3 automakers and their employees are being out-competed:

Leaving aside the fact that it's difficult to talk about cars as being "foreign-made" and "American-made" these days, consumers are not the ones to blame for the closings. Consumers want to get the best product for their money and for lots of consumers, that means buying a car not made by one of the Big Three American automobile producers.

Blame can be appropriately heaped onto politicians who passed and lived with tariffs and quotas that shielded US automakers from competition. Blame can be placed on union and firm negotiators who agreed to contract language that allowed stuff like this:

"If there's no work, they go into Ford's union-mandated jobs bank, where workers continue to report for their shifts, even if they aren't working, in exchange for getting most of their old wages and benefits. But Ford is expected to push hard to get rid of the jobs bank when the current union contract runs out next year."

... a couple of years ago, a driver pulled his car hauler in front of a neighbor's house to pick up a car and transport it to Washington where the neighbor's daughter lives. Our boys (and dad!) thought it was really, really cool to have a car hauler parked outside so my family and I went to look at it. The driver, a friendly fellow, and I were talking about this and that , but one remark he made has stuck with me. He pointed up to the cars sitting on his hauler with their undersides exposed and said:

"When you look at the undersides of these cars, it's easy to see that Japanese cars are much better-made."

That, in a nutshell, is why consumers are not to blame for the Ford plants' closing.

In the National Post (Jan. 28, 2006, p20) an editorial cartoon shows two people on an escalator, presumably at The Bay (once a major retailer in Canada). One person says to the other,

I just hope the Bay maintains its Canadian identity.

All around them, however, are signs for Toshiba, Calvin Klein, Maytag, Nike, Sony, Tommy Hilfiger etc.

For the background story, see this.

Addendum: I had always hoped that the U.S. Target chain would buy The Bay and bring some substantial competition to Wal-Mart in discount retailing in Canada. As it is now, Zeller's (owned by The Bay) seems to be a pretty weak competitor in that market segment.

I was talking with friends two weeks ago and offered this forecast:

Ten years from now, a major competitor in the North American auto industry will be a small car, perhaps something like the Smart car (a real one, not a remote control toy), produced in China.

Further thoughts on the North American auto industry from Forbes:
[h/t to BenS, who sent this link to me following our conversation]

Maybe it is time for the companies to stop their dividends. Maybe it is time for the union to tell its members how bad things are. And maybe it is time for the Governor of Michigan to understand why people don't want to build in her state.

Face up to it Detroit: America doesn't care. You have to save yourselves.

For more on China's auto export industry, read Mark Thoma's post, quoting an item in Time.

[W]hile China may not be the cheapest place to build cars, it's growing more attractive. Tariffs on parts have declined lately, and logistics costs should decrease as China's transport infrastructure improves. Last year Honda became the first foreign automaker to set up a major export operation, shipping a compact to Europe... Chrysler plans to build its 300-model sedan in Beijing for domestic sale and possible export (although not to North America, where autoworkers would probably object). GM and Volkswagen export small quantities too, such as Chevy Venture minivans to the Philippines and Polo compact cars to Australia. ...

[A]lthough Chinese vehicle quality is improving, it lags Western standards by wide margins.

As Mark Thoma comments, "It's a matter of time."

Steve Poloz speculates that Brazil, like Canada, may suffer from the Dutch Disease during the next year.

Booming commodities, a strong currency, concerned exporters, squeezed profit margins and weak productivity. Sound familiar? Welcome to Brazil, which shares a number of economic symptoms with Canada.

Brazil is a big, diverse economy, nearly 50% larger than the Canadian economy after adjusting for variations in relative purchasing power. And, like Canada, Brazil has a large commodity sector. Iron ore, steel, other metals and minerals and agricultural commodities like soybeans, citrus and coffee account for around 70% of Brazil’s exports.

But Brazil has a large manufacturing sector too, that includes such products as automobiles, airplanes, industrial machinery and electronics. And even though Brazil retains a wide array of trade restrictions, these companies are feeling the heat of foreign competition like everyone else.

Given the nature of the Brazilian economy, when commodity markets heat up and their prices rise, Brazil picks up speed, its interest rates go up and its currency appreciates. Economic growth was less than 1% in 2003, but rose to nearly 5% in the commodity boom of 2004. Growth eased to about 3% in 2005 and is forecast to be around 3.5% in 2006. The fly in the ointment is the exchange rate: after averaging around 3.0 against the U.S. dollar during 2002-04, the real has appreciated by around 20% in the past year, to around 2.30.

This is a classic recipe for Dutch disease, much like in Canada...

What is the best way to amplify the damaging effects of a natural disaster? From The Emirates Economist:

Use the strong arm of the government to prevent foreign suppliers from rushing in when domestic supplies are disrupted.

Who loses? The consumer.

Of course, if foreign suppliers rush in, domestic suppliers will scream about "carpet-baggers" and "foreigners" ripping them off and exploiting them. But these complaints will be smoke to disguise their attempts to protect their local market power.

It is sad, but politicians will tend to respond to the arguments of domestic suppliers, not consumers, and the effects of the disaster are made all that much worse as a result.

As an example, EmEc links to this item, which points out that hurricanes Katrina and Rita severely damaged the U.S. sugar crop, thus shifting its supply curve to the left and nearly doubling the price of sugar. Opening the borders to imported sugar could help reduce the size of this effect...

The U.S. dollar has remained strong during the fourth quarter of 2005 despite continuing trade and U.S. federal gubmnt deficits. There are two related reasons for its continued strength:

• Anticipated continued tightening by the Fed, albeit at a slower pace, has kept U.S. interest rates attractive for foreign (and U.S.) short-term financial capital.
• Continued unease about international politics makes the U.S. economy seem less risky than many other options. As I asked last spring, "Where else would you put your money?" I realize there are many options, but just how risky and how attractive are they?

Ben Carliner pointed out last month that the strength of the U.S. dollar is not likely to persist:

Well, in the short term at least, America’s twin deficits just don’t seem to matter. The markets’ attention is elsewhere, and for much of the world, continued economic growth is predicated and strong US demand. Unfortunately, in the long run, current account deficits do matter, and putting off the day of reckoning will make the correction, when it does come, all the harder.

Boom!
Nouriel Roubini has a similar outlook:

In 2006 the structural medium term factor that will tend to weaken the dollar - the large and growing US current account deficit - will reassert its role while the short term cyclical factors that have lifted the dollar this year will tend to weaken their effect. So, at the end you cannot fight the laws of gravity as the cyclical forces that have defied such gravity are temporary while the forces that will cause a gravitational fall of the US dollar are as strong as ever.

Ooomph!
However, Brad Setzer suggests that maybe the rest of the world is willing to keep financing the U.S. twin deficits for quite some time:

Of course, the US can only spend more than it earns so long as the rest of the world is willing to finance the US.

And the People's Bank of China is certainly aware of that it will take large losses on its dollar portfolio if it continues to finance the US. Last I checked, Yu Yongding sits on the PBoC's monetary policy committee, and he was pretty clear about this in a recent speech.
... So far, though, Yu has not convinced the Chinese government to cut back on its reserve accumulation: Chinese reserve accumulation has grown every year since 2000. And so long as China, Russia and Saudi Arabia's central banks are as willing as the markets to finance the US - if not more willing - the US seems set to keep on spending.

So when will they stop, if ever?

For a set of invaluable links and references on the economics of foreign exchange rates, see this post at The New Economist.