China-bashing

I am no fan of China. I have for years been on the Academic Advisory Board for Asia of Human Rights Watch and have advocated an “open mouth” policy in which we citizens here freely criticize China’s egregious human rights violations and its lack of democracy, which I also consider to be an important human right today. After all, the Chinese leadership is neither Stalinist nor Fascist; and ensuring that “they do not get away with it” brings pressure, however small, to get them to change their ways; and it provides moral support to the nascent growth of dissent in China.

Tweet

Email

Print

But the spectacle of China-bashing on their currency, which is now fashionable on Capitol Hill, is sad. Support for politicians who indulged in it was confined to a fringe set of “think tanks” that are known to “go along to get along.” I did not think that this variety of China-bashing would gain respectability in scholarly circles, especially as some of the most profound international macroeconomists today, chiefly my colleague Robert Mundell and the Stanford economist Ronald McKinnon (both of Canadian origin, like the inimitable Ken Galbraith), see nothing wrong with the Chinese exchange rate policy.

But sadly, my remarkable MIT student Paul Krugman has joined the ranks of the China-bashers, many of them among the Democrats and the labor unions (especially the AFL-CIO leadership), which are notoriously anxious about foreign competition and will therefore embrace any argument that advances their anti-trade agenda.

The exchange rate is of course like the hands in your watch; what matters rather is the underlying mechanism, the “fundamentals.” So, make a mental experiment. Let us wish with the China-bashers that China disappears into the ocean. Will that cure the American deficit? Hardly. For, as long as we continue our excess spending, our deficit with China will simply spill over into deficits with Japan, India, Brazil, etc. The problem lies within us: Scapegoating China as the source of our payments afflictions is not for serious scholars.

On the fundamentals, furthermore, Ben Bernanke had floated the thesis that China’s huge net savings had reduced world interest rates which then led our financial institutions to take excessive risk. He has now abandoned this argument. Anyone who has analyzed the complex ways in which the financial crisis unfolded, and the interaction of ideology and interests, and of private and public (e.g. consider the role that Fannie Mae and Freddie Mac played in subprime mortgages) errors that contributed to the onset of the crisis—see my World Affairs article on the subject last October—would be hard put to blame the Chinese savings as a cause of what happened.

Far too much is also made of the huge Chinese surpluses now, as indicative of their perfidy; and that these indicate that they run an undervalued exchange rate. But, as the eminent Australian international economist W. M. Corden has pointed out, the surpluses after 2005 were an inadvertent result of post-2005 domestic factors, rather than a deliberate result of a Chinese decision to grab foreign markets with an undervalued exchange rate. Again, he has argued that these surpluses were “parked” in U.S. treasuries until the Chinese figured out more remunerative ways to invest them.

That is exactly why we can predict that the Chinese will spend these surpluses increasingly on domestic infrastructure which has lagged dramatically behind the phenomenal Chinese growth rate, and where the social returns are much higher. As that happens, the Chinese excess of savings over their investment will reduce. At the same time, our firms like Caterpillar will also benefit from the construction of roads, ports etc.

This applies also to Indian spending of its surpluses: Indian growth rates have been high, though below China’s, and the demand for infrastructure spending is quite strong now. Conversely, the United States’ excess spending will have to come to heel as the President eyes the future and does not wish to preside over the descent of the U.S. further into quicksand. The prospect of a hanging clears one’s mind beautifully.

So, these “global imbalances” are likely to reduce; they are not immutable.

In my own youth, I saw the dollar shortage disappear. My Oxford teacher in the late 1950s, Sir Donald MacDougall, brought out a huge volume titled The Long Run Dollar Problem only to find that the problem had disappeared by the time his book saw the light of the day. Are we so sure that the current global imbalances, even if we decide to deplore them, will be everlasting?