Don’t blame China’s leadership, blame America’s.

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”.

Thanks to Mark Thoma for calling attention to the Robert Samuelson and Paul Krugman pieces.


16 Responses to “Don’t blame China’s leadership, blame America’s.”

  1. Why do you need to interfere with trade to do what you want. Just save enough to balance trade. Surely compulsory saving or more active use of default savings options would make more sense than interfering with trade.

  2. Nicholas,

    Yeah. Actually I agree. Simply raising interest rates to encourage saving and dampen asset-based wealth effects would probably do the trick, and I’m all for minimalism. Tariffs and subsidies are blunt and corruptible instruments.

    I was a bit (more than a bit) hyperbolic in this piece, but I wanted to counter an awful strain of helplessness, actively encouraged by some, that if China wants to play hardball, there is nothing others can do about it, we are doomed by our virtue and our faith in “free trade”.

  3. Qingdao writes:

    Sorry, i didn’t get past the second paragraph; probably the most ignorant statement I have as yet read on all things Chinese;

  4. Qingdao,

    I’m sorry about that, really. I am mostly ignorant about all things Chinese, but what I know, I mostly admire. I intended more to write about things American; it’s the United States’ policies that concern me. I do hope you read the last paragraph, if you could not stomach the first two. The reason why “balance” is a good goal is to prevent untoward oscillations. I do think that policymakers around the world, especially in the United States, but also in China and elsewhere, ought to consider what may come when global imbalance, rather than implying comfortable but unsustainable patterns of consumption and commercial growth, imply less comfortable corrections, defaults, or inflations.

    But I don’t like to come off as nationalistic, or to stoke other peoples’ nationalism. I really think there will be a period of significant crisis in the United States when it is required to produce the same value of tradable goods it consumes (or more, if the US actually pays its debts without devaluation). I think the United States ought to foresee and avoid that crisis, rather than blindly stumbling into it. Unfortunately, China’s trade and monetary policies have something to do with America’s habit of buying goods internationally at remarkably low credit and at very low interest rates. Words like “predatory” and “mercantilistic” are, actually, too loaded. I don’t think China’s policies are motivated, primarily, by “predation”. I think China stumbled upon some policies (looking to Japan and the Asian tigers as examples) that worked at meeting internal development and stability needs, and it has stuck with them, despite some discontent overseas.

    Even if one views China as perfectly innocent (whatever that means in the context of international affairs), it’s worth asking whether changes occurring in the US and elsewhere are desirable or sustainable in the long term, and if not, why they seem to be persistent and slow to self-correct, and what could be done to prevent potentially very destabilizing outcomes.

  5. dissent writes:

    I am hestitant to post at a blog where the author has confessed libertarian sympathies. Is that a relic of an irrational youth? I find some of your stuff interesting.

    In any case, I think Buffet proposal is absolutely the equivalent of a trade war.

    I don’t think the concept of ‘predation’ requires predatory intent. I think China is historically self-absorbed, a function of complexity and size. I think the currency situation and the current account deficit simply cannot be managed with unilateral American action. We should do it sooner rather than later.

    Your second paragraph was perfectly appropriate – no need to grovel!

  6. If anyone’s interested I’ve written a bit about Buffett’s proposal here.

  7. Aaron Krowne writes:

    I’ve been saying for a while now that the US should simply stop selling government (and government-backed) bonds to foreigners in an unlimited fashion. Even rate-limiting these sales, perhaps per-country, or even threatening to do so, would have a dramatic effect! Look at the current effect of substantial threats in the form trade bills — China is essentially panicking, sending delegations of CEOs and bureaucrats over here to buy up as much as possible.

    It would have made a lot more sense to gradually bring the capital system into a sane state early on, rather than slapping tarrifs and making panicky international purchases now (which are simply likely to stoke xenophobic sentiments further).

    Of course, restricting bond sales on a country basis would be tricky technically, given the availability of intermedaries. But it is hard for large players to hide: this is how we financially influence some nation-states regarding terrorism or WMDs. It would be nice to use that ability for productively.

  8. Aaron Krowne writes:


    I should add, I see where Qingdao is coming from. I strongly believe China’s undue manipulations have been negative or zero-sum.

    I am attempting somewhat to separate their legitimate participation in globalization from illegitimate manipulations: currency-pegging well off of equilibrium; horrible treatment of labor; and an abysmal environmental record.

    What isn’t so “brilliant” about the Chinese leadership is their presumably thinking these manipulations wouldn’t come with a cost. The pegged currency lowers the standard of living of the Chinese people from what it would otherwise be, and enriches exporters (and bureaucrats) at the expense of everyone else. Poor labor treatment and lax pollution standards of course do the same, more directly.

    China didn’t need these manipulations to progress. India has been significantly less manipulative, and has settled for a somewhat slower rate of growth (but not much). And so what? Why does the growth need to be at the “hyper” level rather than just “mega”? Humanity can only digest change so quickly…

  9. dissent — I’m glad you find stuff here interesting, even if it is, in a sense, tainted. Re Buffet’s proposal and trade war, I think we’d have to wait and see (and it would depend in part upon presentation and the pace of implementation) whether this sort of policy action to move trade to balance would be perceived as casus belli by US trading partners. But at least it wouldn’t be specifically directed at China, which could minimize some of the nationalistic grievances that an attempt to balance trade might provoke. I agree about intent, and I’m guessing that this slippery philosophical question explains much of the divide between commenters like Qingdao and people like me. It’s perfectly possible for a policy to be predatory and mercantilistic in effect, while being motivated and implemented by institutions not at all motivated to “prey” or “horde”. As you say, mere self-absorption is enough to explain the persistence of policies that cause strain elsewhere, but serve local purposes that are not at all nefarious.

    Nicholas — Thanks for the piece and the link. I’m surprised too that Buffet’s proposal has never “caught on”, at least as a starting point for how to move trade towards balance. Trade imbalance, as Herb Stein reminded us, is a problem that will solve itself, one way or another. Buffet’s proposal allows for a managed descent rather than a precipitous adjustment, and a dangerous morning after. I hope there’s still time for a gentle return to earth.

    Aaron — I agree that the time to act was some time ago, though that doesn’t mean the time for inaction is now. I think in the end we will see a new norm among nations to erect “automatic stabilizers”, that is policies that don’t protect favored industries or control market outcomes, but that provide progressively larger degrees of resistance as trade becomes less balanced. That is, after all, what currency markets are supposed to do, but we have seen they can be subverted.

    I don’t disagree with you at all about the questions regarding the sustainability of China’s growth. The US has borrowed financial capital from China, but China has arguably borrowed a lot of environmental capital from its future citizens, for projects that may not deliver whatever it would take to remedy the damage. I don’t know whether China’s breakneck growth path is ultimately “worth it” or not. The calculation might depend on whether one takes into account the concerns of China’s leadership or the concerns of its population as a whole, or whether one includes geopolitical changes in the arithmetic. Ultimately, all that is for the Chinese to determine, somehow. Still, regardless of whether “hyper” turns out to have been a good idea in China, there is not and never was any need for other countries to transform their own economies on the transparently false premise that China’s great gamble would represent a perpetual free lunch. Accepting a free meal today is one thing, but don’t throw away that fishing rod.

  10. Qingdao writes:

    Thank you for the gracious response; perhaps I should have read the entire post before firing off a response; Aaron Krowne sums up my concerns nicely. One of my frustrations is that here people end up behind bars for things they say on line so I stick to economics.

  11. Qingdao,

    Thank you for the gracious response, and for coming back. We all share one world here. I’m very critical of how nations behave economically, largely because I’m afraid that economic problems if unaddressed will lead to the reemergence of old-style, destructive, nationalism. I’m torn, because I want to write very strongly about how I see nations misbehaving on the one hand (so that maybe things change), but I don’t want to provoke (or exhibit) emotions of national pride or grievance.

    I see the United States and China as engaged in a codependent and mutually short-sighted dance. I had hoped to criticize both nations even-handedly, because I do think breaking this dance is the only path to mutually positive outcomes. With countries as large, powerful, and proud as China and the USA, non-mutually beneficial games, games where one player wins and the other loses, are very dangerous, as a “loser” economically may be tempted to escalate the contest via noneconomic means.

    I look forward to a time when Shanghai and New York are coequal, glittering metropolises, and when citizens of the US, and China (and the rest of the world too!) are wealthy enough, and free enough, to enjoy all that both have to offer.

  12. Qingdao writes:

    I think we can all agree: China/U.S. now the most important economic relationship on the planet; this relationship “unbalanced” and becoming daily moreso. Where we disagree is (1) why this imbalance? (2) What to do about it? Others (Eichengreen) have listed the varying explanations/theories which attempt to answer these questions (my list extends to 12 so far). I think we should be debating: Is this imbalance a natural market resonse to an underlying reality (much like a bank- the u.s. – to a surrounding communiity), in which case no government intervention is required. OR: Is this a classic economic disequilibrium, an economic crisis waiting to happen, in which case both governments should be meeting, intervening to avoid a crisis. I certainly don’t know which is true. We will know in 10 years, but I suspect the answer requires thinking about far more than economics (i.e. trade theory) narrowly defined.

  13. Cassandra writes:

    Stteve, Here are some related thoughts (at the risk of thinking with my mouth open)…

    1. The disequilibrium would not be what it is without mercantilist cheating. Higher USD interest rates, a lower USD, or both, would have long-ago classically bounded the extent to which USA people could spend, import, consume, build houses beyond their means without apparent material consequence other than a signed chit.

    2. To the US’s theoretical and ideological credit, they have chosen rather conciously to proceed with this laissez-faire experiment seemingly without an attempt to coordinate industrial, fiscal, or monetary policy for the longer-term USA Public Interest. In a world where everyone was so inclined, this might have produced less disequilibrious results.

    3. Reserving judgement as to the outcome of such a possibility, current reality was subverted by BOTH mercantilist ambition in Asia, strong labour-oriented public interest defense in Europe, and shameless appropriation of policy in the USA by bona-fide multinational enterprises, and rent-seeking special interests of all manner and persuasion.

    4. Policy-makers in the USA had more-than-ample evidence, and what was initally a slow evolution, towards the current state of disequilibrium. It was anything but benign neglect, but rather policy cynically and parochial serving narrow, intensely-concentrated interests cloaked in ideologically-driven and vaguely short-termist justifications as to the benefits accruing to all trade, without serious contemplation of the externalities and macro results of engaging in something akin to economic war against organized trading adversaries ostensibly with policies to primarily further their national interests, whilst the USA, (rather shamefully from a competitive or sustainability stabndpoint) responded with….nothing but the keys.

    5. Disequilibrium on this scale WILL yield to crisis. Yet, it was eminently possible for BOTH Asian Mercantilists and USA Policymakers (and their voters) at many junctures, to pursue positive courses of action (Asians eschewing intervention; BoJ rate normalization; tigther US Fiscal policy; Asian reval; etc) that would have worked to dampen inertia towards a Triffin Diilemma, the sum of inactions which makes the very dreaded Triffin-like dilemma all the more probable, perhaps even deterministic. This, too, has been apparent to many – ECB economists, the IMF, and various pundits – all whose warnings have been by and large ignored.

    6. None of the above has been lost on markets that are seemingly voting accordingly placing leveraged chips upon hard income-producing assets at an increasingly frenzied pace, because in the absence of any coordination in actions, this is by far the best of bets that pays most handsomely under most scenarios excepting the seemingly less-than-probable cooperative, inflation-taming, credit-restraining one. With increasing agent vs. principal issues underlying the largely correlated wagers, terms like “Trader’s Option” and “Shooting the Moon” spring to mind..

    7. The “Greenspan put” seems tame in comparison to the apparent double-put in force (one by PBoC/SAFE/BoJ and the other under-written by the FRB) presently which explains why credit spreads, VIX vol, YEN vol etc. are so diminished in price. And though we can see the moral hazard, no one seems capable of working to restrain forces than most intuitively know are diverging from long-run equilibrium, rather than converging towards it.

    8. We may not have nthe framework in place yet to fix it, replace (International Central Bank, International Currency etc.), but at the very least we should be using what we know to prevent systemic implosion before its time. First on this list is runaway credit growth and the apparent cavalier attitude of authorities towards the mechanisms that faciliate it. Mahybe I am a fossil, but I recall the days where markets respected G7 coordinated rate rises and the statement there imbued about future speculative tolerance. In the absence of that, in what today is a bigger and ostensibly more macroeconomically unruly place, it is incumbent for the most unbalanced (USA) to unilaterally do what it must do to prevent systemic decay, and if that means tighter fiscal policy, bold energy policy, and consequential recession, then so be it.

  14. Qingdao writes:

    Cassandra: recommend you read William Poole’s article at St. Louis Fed (sorry; don’t have it here) ref. demographic or population change; sort of background radiation for the imbalance; combined with lack of … plus excess savings – intermediated by new technology: bingo, a “natural disequilibrium”; I’m not suggesting you are wrong, just that you contemplate the other, equally convincing argument. Qingdao

  15. Qingdao — I think this is the speech by William Poole you are talking about. I read it a while back, and found it interesting, though not persuasive. (Trying to back that impression up with argument would require rereading and writing, for which I don’t have time right now.)

    Cassandra — “Magisterial” is one of my favorite pundit words, and your thinking with your mouth opens reveals only, um, a magisterial scent on your breath. I suppose it’s not too surprising that there’s very little I disagree with in your off-the-cuff elegance. Very well put.

    Responding to Qingdao’s more general point, it would be interesting for the doomsayers and (ehem) cassandras of capital markets to switch sides, as an exercise, and try to make the best case they (we) can for present arrangements turning out to be good things, a temporary disequilibrium that moves us to a globally better sustainable path than the one on which we started. I think there is a case to be made there, although market cheerleaders don’t make it very credibly, and it would be instructive to see where the pressure points are that will determine, good outcomes or bad. I do think there’s a case to be made that global growth in real human productive capacity, spurred by all the games and imbalances and maneuvers people like me rant about, creates benefits that exceed any adjustment costs. Much of the question turns on just how bad it turns out to be, this crisis (that Cassandra ominously describes as “deterministic”, like the teeth of a watchmakers mechanism, slowly coming around to chew us all up).

    My apologies to all, btw, for abandoning this thread and the blog in general for the past week or so… I’ve fallen behind in my paying gig, such as it is, and have had to disappear into that.

  16. Cassandra writes:


    Thanks for the reference. I read the Poole piece. And I agree there are many compleex contributing factors – none of which were sudden. And whatever tweaking one might have done with the policy knobs, the USA would have endemically seen (as Europe is now seeing) wider trade disparities. But the financing flows to the US remain mostly official, predominantly Asian, and Blanchard’s [and ilk] argument that the US is the attractive place of choice rings hollow for it is not mirrored in the private sector, nor in the European official sector amongst those running surpluses, nor for that matter in increasing rate of of capital flight from the USA by US citizens. While inflation and bubble apologists might call this mere normal portoflio diversification, others looking at it more critically might see it as “insider trading”, not necessarily nefarious, but when management and insiders sell stock, it conveys important signals about future prices (at least according to the academic reserach).

    Secondly, it seems a circular argument to justify the normality and rationality of households dimnished (or more recently, not at all) savings as a result of increased capital gains driven by increases in nominal house and equity values, since they themselves are the result of increased consumption financed by equity withdrawal (over and above long-term experience) from increased residential housing values. The accounting profession flawed as it may be, separates non-recurring from recurring items in the income statement, and increased asset valuations that generates potential income and the Mortgage equity withdrawals are largely (or prudently should be) termed “non-recurring”, from an accounting perspective without some superhuman insight into the certainty of future asset-price inflation. So rather than justify current patterns, I believe the “brave-new-world composition of savings arguments” explain why policy-makers should be concerned about Americans (and markets) extrapolating gains and sources of income that shouldn’t be, and the macro and systemic risk that might result from an [unintended] unwinding of the virtuous circle of credit-driven asset price inflation.

    In my gut, I find these classes of explanations (demographics, savings “glut”, changing composition of savings, optimal household capital strature, etc.) somewhat disingenuous, as if one is trying very hard to subdue the most obvious explanations, and inflate the attractiveness of ancillary and more dubious ones conveniently serving associated political masters. The continental Europeans do not seem to be so smitten, and aren’t reaching for the same unconventional explanations to justify their macro-economic behaviour, housing bubbles, and policies, even though the US demographic position is deviating only mildly from theirs. And I still fail to see why the US should be the overwhelming recipient of the uphill flow of official capital were it not for more self-serving neo-mercantilist reasons (as opposed to more optimal asset allocation of private sector savings) especially when the demographic situation justifications, and economic growth rates, in the emerging world, are arguably more deserving of the capital than the USA.