Robert Samuelson describes China's trade policies as "predatory" and "mercantilistic". Thomas Palley writes that "individual countries can strategically game the [international trading] system for their benefit at the expense of others. That is why the system needs rules and a spirit of cooperation... China has been admitted into the system but it is unwilling to play by the rules, in letter or spirit." I agree.
But. China's leadership has engineered the largest, fastest boom in all of human history, which has lifted hundreds of millions of people out of extreme poverty. They have retained legitimacy and control over a fractious, nearly ungovernable nation, despite capitalist-democratic triumphalism that loudly proclaimed their style of governance a relic. They have advanced China's national interest, and their own interest in clinging to power, brilliantly.
In doing so they have broken some rules. Well, knock me over with a feather. Nations play hardball with one another. When confronted with a choice — huge welfare gains for their citizens and huge personal benefits for themselves, or some genteel rules set by nations that have historically mistreated them — China's rulers opted to look out for number one. Incentives matter. What would an economist expect?
I dislike China's form of government, its authoritarianism, its brutality, its disrespect for liberty and free expression. But in terms of industrial and economic policy, the country is kicking ass and taking names. While it remains to be seen how sustainable its achievements are, China's leadership deserves admiration more than condemnation for its trade policy. They have not played nice. They have done what nations do, and done it well. They have acted in their own, and their citizens', self-interest.
The United States, on the other hand, has not acted admirably. Games, even the very high-stakes games played between nations, involve more than one player. It has been obvious for several years that China has been acting mercantilistically, that its government has been taxing workers to subsidize exports, undercutting American industry while buying political support in the US with easy credit and low, low prices. This has not been rocket science. Yet America has done nothing but mildly complain.
The United States needn't have stood helplessly by and watched China cheat. It might have acted. No, it is not rampant American consumerism or any other mushy cultural deficiency that is to blame. Consumers in the United States have been quite rational, buying artificially cheap products offered with very generous financing. Demand curves are downward sloping. But when individually rational behavior adds up to collectively poor results, it is the job of governments to change the incentives.
The US government has always had it in its power to bring trade into balance. It has the power enact tariffs, grant subsidies, and control the flow of foreign capital. America's central bank could "sterilize" all the excess credit provided by dollar-pegging exporters by selling US bonds and purchasing diversified portfolios of foreign debt. Even the credible threat of any of these policies might have persuaded China that it was more in its interest to "play by the rules" than to flout them. But the self-interest of the bought, combined with free trade as ideology, has prevented any of that from happening.
America's large deficits can't persist indefinitely. As Thomas Palley is right to note, America's choices are "pay now, or pay more later." Breaking America's China "addiction" (as Paul Krugman put it) will be difficult. But it does need to happen, "the sooner the better."
China is well on its way to becoming the world's largest economy, and its growing prosperity has been earned, not stolen. The US need not, and ought not, start a trade war with China. There is no need to single out China at all. The United States should simply take policy action to get its own house in order. It should force its trade into overall balance quickly, and endure whatever pain and dislocation that will entail. There are many workable policy choices. (I remain partial to Warren Buffett's proposal.)
In any hopeful future, the United States and China are both large, vibrant economies, and good friends. Culturally and commercially, China and the United States have a great deal to offer one another. China has played rough. So what. The US should congratulate China for its successes thus far, and wish it the best in the future. At the same time, policymakers should make clear that the rules of the game have changed, and that while America eagerly embraces globalization and interdependence, it will not accept asymmetrical relationships of dependence. Even if that means violating some rules of "free trade".
|Steve Randy Waldman — Wednesday May 9, 2007 at 7:15am||permalink|