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May 09, 2007

So What's the Problem?

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 that way but as ever, there's a slip 'tween cup and lip. By deliberately having an undervalued currency (the accusation) China makes what they send us cheaper in our own currencies than it would otherwise be. We are therefore made richer by having more money (resources) to spend on other things.

Those Chinese exporters are therefore receiving fewer pounds, dollars, euros etc than they would have, making them poorer.

Which is what always happens with a mercantilist trading policy. It might start out attempting to make the country (economy, people etc) adopting it richer but in fact it makes them poorer. We've known this for 190 years and running now.

The complaints about China's trade policies are therefore entirely misguided. We could point out that they are only shooting themselves in the foot while we are making hay at their expense, but why would we want to do that while we are the ones that benefit?

May 9, 2007 in Trade | Permalink

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Comments

"We could point out that they are only shooting themselves in the foot"

Perhaps that is why e.g. the US is forever whining about the artifically low Chinese currency, because they know that the more they complain, the more the Chinese will dig their heels in and not revalue.

If we ran round saying "Thank you China, thank you for your cheap currency! We need cheap goods more than your workers need food or clothes!" and holding celebration parties outside Chinese embassies giving free bottles of champagne to everybody in the building, maybe that is exactly what would make them revalue.

Posted by: Mark Wadsworth | May 9, 2007 11:14:22 AM

I think it's hard to make the argument that china's exchange rate policy is making the country poorer. If, as I assume, if you mean 'poorer than a floating exchange rate would' I still think it is a debatable point. There are wider considerations than the exact amount of yuan they receiver per dollar.

Posted by: Matthew | May 9, 2007 12:39:28 PM

Matthew,
Could you expand on "wider considerations"?

Posted by: Kit | May 9, 2007 2:50:04 PM

"By deliberately having an undervalued currency (the accusation) China makes what they send us cheaper in our own currencies than it would otherwise be."

Yes.

"We are therefore made richer by having more money (resources) to spend on other things."

No. What the Chinese are doing is effectively giving us a loan on their terms, to be called in when they feel like it.

"Those Chinese exporters are therefore receiving fewer pounds, dollars, euros etc than they would have, making them poorer."

For the time being; until it suits them to change. See above.

"Which is what always happens with a mercantilist trading policy. It might start out attempting to make the country (economy, people etc) adopting it richer but in fact it makes them poorer."

Hmm...not so sure Bismarck would have agreed with you on that. After all, those idiotically protectionist Germans sold all us free trading Brits so many clocks that, as I narrated a wee while back, at the start of WWI we had to import timer technology from the Swiss.

"We've known this for 190 years and running now."

Speak for yourself.

"The complaints about China's trade policies are therefore entirely misguided. "

Indeed. They all come from the wrong angle.

Posted by: Martin | May 9, 2007 5:13:38 PM

"No. What the Chinese are doing is effectively giving us a loan on their terms, to be called in when they feel like it."

Could you explain, to an economically illiterate person like myself, what this means. Should I be scared that they are going to repossess my telly;)

Posted by: Kit | May 9, 2007 5:43:45 PM

"Should I be scared that they are going to repossess my telly"

That's a question one might usually expect from a smartass.

The fixed dollar/yuan tie pegs the prices of goods below their market value, making them appear cheaper than they are, for sure - but wealth, the great big flow that Tim tells us keeps getting bigger, would only increase in real terms were the Americans to control the level at which the yuan was pegged.

Nations being the irrational entities they are, it is within the power of the Chinese to cut the exchange rate AND dump the dollars they hold (the rather more important of the two overdrafts they hold over the USA). If they cut the currency tie then the USA's debt fuelled, savings light, consumption driven economy might be dealt a mortal blow; they have no savings from which they can keep spending, they have hollowed out their industrial capacity in pursuit of greater 'wealth' and have imported an army of low wage migrants specifically to act as a brake on wage inflation.

But then again, so have we.

On the other hand China is savings rich, and might just be able to sustain their entire output, or at least a significant part of it, from internal consumption.

If they dump their dollars, the dollar's value would sink like a stone and the USA, overcommitted in Iraq and Afghanistan, would be unable to raise neither the money nor the willpower to defend Taiwan from a Chinese invasion.

Posted by: Martin | May 9, 2007 7:43:02 PM

Kit,

Well off the top of my head - they might consider

1. Boosting anufaturing employment
2. Avoiding a 1998-style Asian currency crisis

Posted by: Matthew | May 9, 2007 10:47:07 PM

whoops -manufacturing

Posted by: Matthew | May 9, 2007 10:47:51 PM