« Do You Agree? | Main | The FOMC Holds Target Rate at 5.25% »

Wednesday, May 09, 2007

Robert Samuelson: China's Trade Time Bomb

I'm weary of the free-trade argument today. If you're so inclined, have at it - I'm going to sit this one out:

China's Trade Time Bomb by Robert J. Samuelson, Commentary, Washington Post: It sometimes seems as if almost everything we buy comes from China: DVD players, computers, shoes, toys, socks. This is, of course, a myth. In 2006, imports from China totaled $288 billion, about 16 percent of all U.S. imports and equal to only 2 percent of America's $13.2 trillion economic output (gross domestic product). Does that mean we don't have a trade problem with China? Not exactly.

China is already the world's third-largest trading nation and seems destined to become the largest. On its present course, it threatens to wreck the entire post-World War II trading system. Constructed largely by the United States, that system has flourished because its benefits are widely shared. Since 1950, global trade has expanded by a factor of 25. By contrast, China's trade is mercantilist: It's designed to benefit China even if it harms its trading partners.

There's a huge gap in philosophy. By accident or design, China has embraced export-led economic growth. The centerpiece is a wildly undervalued exchange rate. ... The resulting competitive advantage props up exports, production and jobs. ...

Despite popular impressions, China's trade offensive hasn't yet seriously harmed most other economies. For example, ... that hasn't stymied job creation; the U.S. unemployment rate is 4.5 percent. And world economic growth has accelerated.

But what's been true in the past may not be true in the future. The huge U.S. trade deficits, fed by Americans' ravenous appetite for consumer goods and heavy borrowing against rising home values, stimulated economies elsewhere, including China's. Now that stimulus is fading as U.S. home prices weaken and consumers grow more cautious. For China to expand production, demand must come from its own consumers or other nations... There's the rub.

Update: PGL has lots more to say about this. As he says in an email, "OK, you outsourced that one to this Angrybear."

Even Chinese officials favor higher local demand. But either they can't or won't stimulate it. Personal consumption spending is a meager 38 percent of GDP; that's half the U.S. rate of 70 percent. The Chinese save at astonishingly high levels, partly because they're scared of emergencies. The social safety net is skimpy. Health insurance is modest... There's no universal Social Security, and only 17 percent of workers have pensions. A mere 14 percent are covered by unemployment insurance. ...

A low currency ... serves two roles: as an inducement to attract foreign investment, and as a tool to balance the economy and to check popular discontent. But for the rest of the world, the consequences are potentially threatening. As China moves up the technology chain, it may become the low-cost export platform for more and more industries. This could divert production from the rest of Asia, Europe, Latin America and the United States.

It is not "protectionist" (I am a long-standing free-trader) to complain about policies that are predatory; China's are just that. The logic of free trade is that comparative advantage ultimately benefits everyone. ... But the logic does not allow for one country's trade systematically to depress its trading partners' production and employment. Down that path lie resentment and political backlash. ...

Given the immense stakes -- literally the future of the global trading system -- the Bush administration has been too timid in pushing China to change. The Treasury Department won't even declare China guilty of currency manipulation. No doubt doing so would irritate the Chinese. But avoidance is no solution; the longer these problems fester, the more intractable and destructive they will become.

How hard should we push? Here's Krugman:

The Chinese Connection, by Paul Krugman, NY Times, May, 2005: Stories about ... condemning China's currency policy probably had most readers going, "Huh?" Frankly, this is an issue that confuses professional economists, too. But let me try to explain what's going on. ...

Here's how the U.S.-China economic relationship currently works: Money is pouring into China, both because of its rapidly rising trade surplus and because of investments by Western and Japanese companies. Normally, this inflow of funds would be self-correcting: both China's trade surplus and the foreign investment pouring in would push up the value of the yuan, China's currency, making China's exports less competitive and shrinking its trade surplus.

But the Chinese government, unwilling to let that happen, has kept the yuan down by shipping the incoming funds right back out again, buying huge quantities of dollar assets... This is economically perverse: China, a poor country where capital is still scarce by Western standards, is lending vast sums at low interest rates to the United States.

Yet the U.S. has become dependent on this perverse behavior. Dollar purchases by China and other foreign governments have temporarily insulated the U.S. economy from the effects of huge budget deficits. This money flowing in from abroad has kept U.S. interest rates low despite the enormous government borrowing required to cover the budget deficit. ...

Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise... And we'll suddenly wonder why anyone thought financing the budget deficit was easy. In other words, we've developed an addiction to Chinese dollar purchases, and will suffer painful withdrawal symptoms when they come to an end.

I'm not saying we should try to maintain the status quo. Addictions must be broken, and the sooner the better. After all, one of these days China will stop buying dollars of its own accord. And the housing bubble will eventually burst whatever we do. Besides, in the long run, ending our dependence on foreign dollar purchases will give us a healthier economy. In particular, a rise in the yuan and other Asian currencies will eventually make U.S. manufacturing, which has lost three million jobs since 2000, more competitive.

But the negative effects of a change in Chinese currency policy will probably be immediate, while the positive effects may take years to materialize. ...

And here's Joseeph Stiglitz, who is also in the "be careful what you wish for" category, at least in the short-run:

US has little to teach China about steady economy, By Joseph Stiglitz, FT: ...[I]t is time for a calmer assessment about what [revaluation] does and does not mean for China, for the US and for the global economy. …

[W]hether this, or a succession of revaluations, eliminates China’s trade surplus will have little effect on the more important problem of global trade imbalances, and particularly on the US trade deficit. Much of China’s recent gains … came at the expense of other developing countries. America will once again be buying from them, and so total imports will be little changed. … Unless domestic investment goes down or domestic savings go up, the trade deficit will persist, unabated.

The trade deficit could diminish but if it does, it will not be a pretty picture. Domestic investment, for instance, could go down if we succeed in getting our wish and China’s trade surplus disappears; with China no longer using the money from its trade surplus to fund our huge fiscal deficit, medium- and long-term interest rates would rise [causing an] economic downturn...

    Posted by on Wednesday, May 9, 2007 at 03:24 AM in China, Economics, International Finance, International Trade | Permalink  TrackBack (3)  Comments (34)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference Robert Samuelson: China's Trade Time Bomb:

    » So What's the Problem? from Tim Worstall

    Various economists (Samuelson, Krugman, Stiglitz) chew over China and trade. The nugget at the heart of it: By contrast, China's trade is mercantilist: It's designed to benefit China even if it harms its trading partners. It may well be designed [Read More]

    Tracked on Wednesday, May 09, 2007 at 02:43 AM

    » Don't blame China's leadership, blame America's. from Interfluidity

    Robert Samuelson describes China's trade policies as "predatory" and "mercantilistic". Thomas Palley write... [Read More]

    Tracked on Wednesday, May 09, 2007 at 04:16 AM

    » Another Time Bomb for China: Trade from The Glittering Eye

    Some time ago I ran a series of posts on several problems facing China: environmental degradation, demographics, and their fragile banking system, characterizing them as Chinas time bombs. This morning economist Robert Samuelson ... [Read More]

    Tracked on Thursday, May 10, 2007 at 08:44 AM


    Feed You can follow this conversation by subscribing to the comment feed for this post.