May & Nölke: Capitalism in Large Emerging Economies and the New Global Trade Order

From the Introduction:

Large emerging economies have increased their share of the global economy quite substantially over the last decades. Whereas discussions regarding the international political economy previously were focused on the US, EU and Japan, today this focus would be difficult to uphold anymore. In particular China, India and Brazil easily surpassed the established economies in terms of GDP growth, trade growth and industry value added growth during the last 30 years.

Although these figures fluctuate quite substantially on a yearly basis, there are no sound reasons to assume that this long-term tendency is likely to reverse any time soon. Correspondingly, countries such as Brazil, China and India increasingly have to be counted as heavyweights regarding the future of the global economy. Moreover, the large emerging markets recently have begun to organize themselves, in order to coordinate their activities regarding the global economic order. Examples for this coordination include the institutionalized cooperation between India, Brazil and South Africa (IBSA), the BASIC alliance (also including China), or the BRICS grouping, additionally comprising of Russia. In the long term, we thus may assume that we do not only witness a shift in economic importance in favor of large emerging economies, but also a conscious effort by the latter in order to influence global economic rules.

The likely consequences of the rise of the large emerging economies for the global economic order have been discussed widely during recent years (e.g., Cooper et al. 2007; Hurrell 2006; Subacchi 2008). However, the large emerging markets so far have focused on getting a seat at the table (e.g. larger voting rights in the Bretton Woods-institutions, participation in the Basle Committee), and have only just begun to outline their demands regarding specific policies. Thus, on the substance of this new global economic order, many of the existing accounts are either heavily speculative or, in contrast, purely descriptive and thus unable to make any substantial statement regarding the likely future course of events.

In order to overcome this state of affairs, our approach is based on the assumption that we need to develop clear analytical perspectives on the behavior of large emerging economies regarding the global economic order, if we want to surpass a state of discussion that is overly descriptive and/or speculative. The specific perspective that we are developing in this contribution is a “second image” one, in the terminology of Waltz (2001), i.e. we are highlighting the importance of domestic economic structures for the explanation of global economic policies. In contrast to liberal theories of international relations (Moravcsik 1997, Schirm 2012), however, we do not focus on the interactions between domestic societal interest groups and governments, but rather study the broad capitalist structures that have evolved in large emerging markets. The reason is twofold: On the one side, we are interested in the long-term evolution of emerging markets’ positions on the global economic order, a research interest that does not lend itself well to the demarcation of the issue-specific preferences of particular interest groups in individual countries, the usual approach of these liberal theories. On the other side, we are deeply skeptical regarding the application of conventional liberal-pluralist models of democratic policy-making to countries such as China, but also Brazil and India. Instead, we assume – in a more historical-institutionalist perspective – that the type of capitalism dominating in the large emerging economies will also determine their long-term preferences regarding the global economic order, i.e. they will want to make sure that global economic rules do not inhibit the functioning of their domestic economic order (Fioretos 2011). More specifically, we are situating our analysis in the approach of critical institutionalism within comparative capitalism (May and Nölke 2013), i.e. we are comparing national capitalist institutions from a perspective that is highlighting the historical evolution of specific forms of capitalism, based on their mode of integration into the global political economy and on domestic class struggles. Form this perspective, we are arguing that there are important commonalities between the national varieties of capitalism that have developed in the large emerging markets, and that this new type of capitalism is an important determinant of the future global economic order.

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Scissors: Chinese global investment growth pauses

Key Points
 Chinese foreign investment declined through mid-2014 for the first time since the
financial crisis.
 By sector, energy draws the most investment, but a slump in energy spending
means that metals and real estate have been more prominent so far in 2014.
 The United States has received the most Chinese investment since 2005, followed
by Australia, Canada, and Brazil. China invests first in large, resource-rich nations
but has also diversified by spending more than $200 billion elsewhere.
 Chinese investment benefits both China and the recipient nation, but host
countries must consider thorny issues like Chinese cyberespionage and subsidies.

 

Available for download here.

Rosen and Hanemann: New Realities in the US-China Investment Relationship

From the Executive Summary:

For decades, foreign direct investment (FDI) flows between the US and China were a one-way street: American multinationals invested in labor-intensive manufacturing and consumer-oriented operations in China, but Chinese firms had neither motive nor capacity to invest in the US economy. In the past 5 years this situation has changed profoundly, as Chinese investment in the US took off, and, by most measures, now exceeds flows in the other direction. This sea change suggests opportunity, but also a pressing need for policy leadership to ensure a success story does not turn into a new grievance.

Key Findings:

  • After 5 years of rapid growth, Chinese annual FDI in the US now exceeds FDI by US companies into China by most measures — including China’s own official statistics.
  •  These investment flows bring benefits for Americans, including job creation and a more competitive consumer market, and have the potential to be a major contributor to stronger US-China relations.
  • However, this turning point calls for increased policy attention, including US leadership in support of continued openness and timely Chinese investment liberalization to keep pace with changing trends on the ground.

Recommendations:

  • Chinese and US officials need to jointly acknowledge the changed pattern in two-way FDI flows. Failure to recognize new realities will cause confusion and aggravate existing perception biases on both sides.
  • In light of the data trend, leaders must correctly diagnose the threats to two-way investment growth. These risks include the possibility that the US investment screening process could be stretched beyond protecting solely national security, and that China’s steps to open its foreign investment regime could occur too slowly and half-heartedly to forestall investment protectionism abroad.
  • Reality-driven expectations will naturally fall on the ongoing US-China bilateral investment treaty (BIT) negotiations. Since the US imperative is not to open, but simply to stay open, the bold progress in these talks must principally come from the Chinese side, including a heavily trimmed down “negative list” of sectors to be partly or wholly excluded from liberalization.

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Devereux & Yetman: Responding to exchange rates in a globalised world

ABSTRACT:

How should monetary policy respond to nominal exchange rates? How does this change as economies become increasingly globalised? In this paper, we address these questions for Asia, focusing on structural changes that may influence the optimal policy response to exchange rates. We also summarise some new results based on an analytical model outlined in Devereux and Yetman (2014b) designed to address these issues. We show that sterilised intervention can be a potent tool that offers policymakers an additional degree of freedom in maximising global welfare. We illustrate how the gains to sterilised intervention can be sensitive to various aspects of goods and financial market structure. When financial internationalization is high, the gains to sterilised intervention fall. And at the limit of perfect financial integration, the gains from sterilised intervention are entirely eliminated. Unsterilised intervention may also have a role to play, and may continue to work even in cases where sterilised intervention is rendered ineffective.

Many central banks in Asia have actively used sterilised foreign exchange intervention as a policy tool for smoothing exchange rate movements. This is a policy that appears to have served the region well. But, over time, structural changes in the region, including increased goods market integration, declining exchange rate pass-through and ongoing internationalisation of financial markets are likely to reduce the efficacy of sterilised intervention. More generally, these structural changes may call into question the appropriate role of exchange rates in monetary policy setting in the region.

Available for download here.

Hanemann & Rosen: High Tech – The Next Wave of Chinese Investment in America

From the Executive Summary:

WHILE CHINA STARTED INVESTING AROUND THE WORLD in the early 2000s, the first waves of Chinese overseas investment targeted mostly extractive mining activities in developing countries and resource-rich advanced economies such as Australia and Canada. Over the past five years, however, Chinese capital has begun to flow into non-extractive sectors in advanced economies, increasingly targeting technology- and innovation-intensive industries.

Initially, the surge of Chinese outward foreign direct investment (OFDI) in the United States largely responded to opportunities in energy and real estate, but access to technology and innovation is now becoming an important driver. In the first quarter of 2014 alone, Chinese investors announced high-tech deals worth more than $6 billion, including the takeovers of Motorola Mobility, IBM’s x86 server unit, and electric carmaker Fisker.

China’s arrival as a technology investor brings benefits to the United States, but it also reinforces concerns, particularly at a time of difficult U.S.–China relations in technology. The United States blames China for technology theft and failed international trade negotiations; China, for its part, still follows discriminatory industrial policies and is contemplating a more nationalistic approach to technology in light of recent electronic surveillance revelations.

In this report, we explore the advent of Chinese investment in U.S. high-tech sectors in order to provide an objective starting point for debate about this nascent trend. We use a unique dataset on Chinese FDI transactions in the United States to describe the patterns of Chinese FDI in U.S. high-tech sectors, elaborate on the firm-level drivers of those investments, and present an initial assessment of the impacts from a U.S. perspective. We then identify the most important impediments to two-way U.S.–China high-tech investment flows and present recommendations for policy makers and businesses on both sides to address these stumbling blocks.

We believe that growing Chinese outbound high-tech investment is an important determinant of the path forward for U.S.–China relations in general. Successful Chinese investments will make Americans recognize the potential benefits of greater economic integration with China through two-way investment flows and remind Chinese leaders that openness and convergence with a market-based innovation approach is in China’s own interest. A negative U.S. response to growing Chinese investment will aggravate existing tensions and give encouragement to proponents of a more nationalistic and discriminatory approach to technology, triggering a backlash against foreign firms in China and risking a protectionist downward spiral.

 

Available for download here.

Kashcheeva & Tsui: Why Oil Importers Diversify their Import Sources Politically? Evidence from U.S. Firm-Level Data

ABSTRACT:

International politics affects oil trade. But why? We construct a firm-level dataset for all U.S. oil-importing companies over 1986-2008 to examine what kinds of firms are more responsive to change in “political distance” between the U.S. and her trading partners, measured by divergence in their UN General Assembly voting patterns. Consistent with previous macro evidence, we first show that individual firms diversify their oil imports politically, even after controlling for unobserved firm heterogeneity. We conjecture that the political pattern of oil imports from these individual firms is driven by hold-up risks, because oil trade is often associated with backward vertical FDI. To test this hold-up risk hypothesis, we investigate heterogeneity in responses by matching transaction-level import data with firm-level worldwide reserves. Our results show that long-run oil import decisions are indeed more elastic for firms with oil reserves overseas than those without, although the reverse is true in the short run. We interpret this empirical regularity as that while firms trade in the spot market can adjust their imports immediately, vertically-integrated firms with investment overseas tend to commit to term contracts in the short run even though they are more responsive to changes in international politics in the long run.

 

Available for download here.

Campanella: The Internationalization of the Renminbi and the Rise of a Multipolar Currency System

ABSTRACT:

The dollar’s steady depreciation has had little impact on the official reserves of central banks. As scholars of the international monetary system debate whether the dollar can continue to play the dominant role in the international monetary system, actual developments in exchange relations already give reason to expect that the world’s currency regime is changing. Recent measures taken by China to internationalize its renminbi, including several bilateral swap agreements signed with other central banks, have reinforced other eastward trends in the world economy.

In this paper, China’s acceleration of renminbi internationalization is examined. The growth of renminbi-based trade and settlements has made it Asia’s new reference currency, surpassing the US dollar. These developments are mostly due to the effects of the financial crisis and have been supported by the region’s economic and financial integration. As a reference currency of necessity or choice, the emergence of the renminbi in Asia is set to weaken the current global dominance of the US dollar. In conclusion, the paper makes the case that the growth of the renminbi as an international currency could generate a multipolar currency system that balances and distributes responsibilities in a better way than the current currency regime.

 

Available for download here.

Koch: Constructing a viable EU-GCC partnership

ABSTRACT:

Relations between the European Union (EU) and the Gulf Cooperation Council (GCC) were formalized through the 1988 Cooperation Agreement. Since that period and especially since the decision by the GCC to implement a customs union, relations between the two sides have grown institutionally and become multi-faceted. In addition to broader and deeper official contacts, there is now also a series of project and exchange networks in place which have allowed for better people-to-people interaction. The quantitative improvement has, however, not translated into a qualitative one as well. Free trade area negotiations have never been concluded and a recent Joint Action Programme was not renewed at the 2013 ministerial meeting. What is therefore clear is that common interests are insufficient as drivers of the relationship, hampered by institutional incongruities, normative differences and a preference for bilateralism over multilateralism. Taken together, this raises questions about the degree to which both the EU and the GCC will remain committed to a more comprehensive relationship, especially at the strategic and political level.

 

Available for download here.

Kurtishi-Kastrati: The Effects of Foreign Direct Investments for Host Country’s Economy

ABSTRACT:

Foreign Direct Investment (FDI) is seen as the fundamental part for an open and successful international economic system and a major mechanism for development. In this circumstance, the paper examines the benefits of FDI as a key component for successful and sustainable economic growth and also as a part of a method to social improvement. The aim is to highlight the most important channels through which FDI makes a significant and exceptional impact on the economic development of the host countries. At the same instance, it is important to recognize that, like all things, FDI is not all good no bad. A separate discussion is devoted to the potential negative impacts of FDI flows on host economies.

 

Available for download here.

Barroso: Does trade shrink the measure of domestic firms?

ABSTRACT:

Does international trade shrink the steady state measure of domestic firms? The most recent models with heterogeneous firms suggest it does (Melitz (2003), Chaney (2007) and Arkolakis (2008)). The main force at work in such models is the selection of the fittest, with the least efficient firms exiting the market. Within the same class of models with heterogeneous firm productivity and strong selection effects, both in the consumption goods and the intermediate goods sectors, this paper shows that the measure of domestic firms may actually expand. The result is robust to the particular production function used to bundle labor and intermediate goods.

 

Available for download here.