Another Time Bomb for China: Trade

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 “China’s time bombs”. This morning economist Robert Samuelson has a column in the Washington Post on yet another “time bomb” for China—trade:

Since 2001, China’s surplus on its current account — the broadest measure of its trade flows — has jumped from $17 billion to $239 billion. As a share of China’s GDP, it has zoomed from 1.3 to 9.1 percent. These figures include Chinese firms and multinational companies doing business in China.

Despite popular impressions, China’s trade offensive hasn’t yet seriously harmed most other economies. For example, America’s current account deficit (to which Chinese imports contribute) was $857 billion last year, up from $389 billion in 2001. Still, 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 — or some other country’s production must be displaced. There’s the rub.

Is that really true? It seems to me that when you purchase shoes made from China for less than what you would spend for the same shoes made here that you have both the shoes and something left over to spend on something else i.e. you’re better off than you were before. Or, in other words, production doesn’t need to be displaced. It’s a non-zero sum game.

However, what highly-subsidized Chinese products made in an economy that’s still largely a command economy with so many phony numbers and statistics that in all likelihood the Chinese themselves don’t really know what their actual costs of production are will do is distort the market. That market distortion leads to some industries leaving the United States, in all likelihood never to return.

And, then, of course there’s the subject that’s become my favorite over the last month or so: phony Chinese wheat gluten. With some products e.g. food, pharmaceuticals who really knows if the Chinese version you’re buying really is the same product as the U. S. version? Or, put more succinctly, perhaps it’s “Chinese shoes—good; Chinese wheat gluten—bad”.

I do agree with Mr. Samuelson that in the long run it would be better for China if China’s internal market were generating more of its growth than export trade and foreign investment. I can only speculate what that’s not so. Perhaps China ruling oligarchy is afraid of its own people. Perhaps rather than looking at China as a market of more than a billion people it would be better to look at it as a market of a few thousand of the ruling elite and their families.

And we also need to tend to our knitting. My own pet solution to the problems created by the loss of U. S. industries that actually make stuff to competition from low-cost Chinese competition and, increasingly, loss of U. S. industries that create stuff to a combination of foreign competition and widespread disregard of U. S. intellectual property rights is to stop protecting our own protected industries. But, of course, that idea will never gain any traction.

Mark Thoma has a good round-up of reactions to Samuelson’s column.

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