Thoughts on trade policy and pegs
Lifted from comments. Vtcodger summarizes his thoughts on a layman’s approach to trade and trade policy:
1. It’s pretty clear that there is no protocol for determining if a currency is under or over valued relative to another or by how much. It’s all guesswork.
2. Foreign Exchange probably is not a marketplace that is efficient with regard to cost of goods. Other factors like perceived stability of currencies and speculative forces probably cause exchange rates to be (considerably?) different than they would be if they were set only by cost of manufacture, shipping, and similar trade related factors.
3. Attempts to deal with trade balances between individual pairs of countries in isolation are probably going to produce dubious results. (But that won’t keep folks from trying).
4. If one were to look at all the trade relationships on the planet, one would probably find that there is no set of values for the currencies that makes them all “fair”.
5. The expectation that revaluing the renimbi upwards will solve US trade problems is probably nuts. A small upward revaluation will probably help. But for every good, once some other nation (which will rarely be the US) becomes the low cost provider, the (Multi-national companies) will simply swich providers and the Yuan exchange rate will be irrelevant to trade in that product. Beyond a certain point, this is a lose-lose game for the US and China.
I believe it was Mark Thoma who ran through a list of standard assessments of “right” currency valuations, making the point that they given rather different outcomes, and often contain a bit go numeric question-begging. You get out what you put in. So yes, there is no solid measure of currency over or undervaluation.
That doesn’t mean prices don’t matter. Currency rates are essentially prices, but with a very special catch. They affect the relative prices of all the stuff denominated in the currencies in question. To say that revaluation and devaluation don’t matter is to say that prices don’t matter.
More realistically, there are feedback mechanisms which serve to limit the impact of FX swings on the flow of goods across borders. That said, we have seen this pattern before, and seen that it works. The yen was very weak against the dollar, and Japan ran a trade surplus. Japan also had a high domestic savings rate, but that is closely related to the high cost of goods in the economy, which is related to the FX rate. It’s one of the reasons that FX rates do have a significant impact on trade. Now, we see a very similar pattern in China. A stronger yuan would mean lower cost goods for Chinese consumers, and that is likely to mean higher domestic consumption as a share of GDP. That’s they way it usually works.
Peter Morici doesn’t appear to agree with VtCodger. Here is an article Morici emailed this morning that will be published by various media sources today or later this week.
Trade Deficit Burdens Economic Recovery
Peter Morici
Apr 12, 2010 8:37 AM
FULL TEXT:
Tuesday, the Commerce Department will report the February deficit on international trade in goods and services. Analysts expect it to increase to $39.0 billion from $37.3 billion in January. My forecast is in line with the consensus.
The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. Now, a rising trade deficit and continued weakness among regional banks threatens to stifle the emerging recovery and keep unemployment near 10 percent through 2011.
At 3.1 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package adds. Moreover, Obama’s stimulus is temporary, whereas the trade deficit is permanent and growing again.
Subsidized manufactures from China and petroleum account for nearly the entire deficit, and both will rise as consumer spending and oil prices rise through 2010
Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.
When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result, and the economy goes into recession.
To keep Chinese products artificially inexpensive on U.S. store shelves and discourage U.S. exports into the Middle Kingdom, China undervalues the yuan by 40 percent.
Beijing accomplishes this by printing yuan and selling those for dollars to augment the private supply of yuan and private demand for dollars. In 2009, those purchases were about $450 billion or 10 percent of China’s GDP, and 28 percent of its exports of goods and services.
In 2010, the trade deficit with China is reducing U.S. GDP by more than $400 billion or nearly three percent. Unemployment would be falling rapidly and the U.S. economy recovering more rapidly but for the trade deficit with China and Beijing’s currency policies.
Longer term, China’s currency policies reduce U.S. growth by one percentage point a year. The U.S. economy would likely be $1 trillion larger today, but for the trade deficits with China over the last 10 years.
In negotiations with U.S. Treasury Secretary Timothy Geithner, China has suggested a three percent revaluation of its currency over the next year; however, such a small change would do little to change those numbers. In fact, because of Chinese modernization, the intrinsic value of China’s currency rises each year. Hence, a three percent revaluation over the next year would not even amount to the change in yuan undervaluation.
As the U.S. trade balance with China grew worse, Beijing could say “see exchange rates don’t matter.”
President Obama must weigh much tougher action against Chinese mercantilism, or China’s trade policies will impose slow growth and high unemployment on the United States.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.
Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
pmorici@rhsmith.umd.edu
http://www.smith.umd.edu/lbpp/faculty/morici.aspx
.
One part of the problem is trade, but the other part is finance of that trade. There is a reasonable likelihood that highly imbalanced trade and the large flow lf finance that went with it helped create the conditions for financial crisis.
kharris’ makes good points. Your post is good, up to the last point, where you make the erroneous claim that a revaluation of the renminbi wouldn’t matter. Think of it in terms of the global export supply to the U.S. China is a significant part of the global supply, so a renminbi revaluation would shift that supply inward significantly, raising the price of U.S. imports and reducing the amount purchased. Stated another way, the Chinese foreign currency purchases must result in a movement in the Chinese trade balance towards surplus by the amount of the purchases. (This is true by the balance-of-payments identity, whether the actual trade balance is a surplus or deficit.) The cessation of the purchases would move their trade balance towards deficit. Do you really think it is realistic to argue that none of this change in their trade balance would be reflected in the U.S. trade balance? Note that globally, all the trade balances must sum to zero.
There’s a lot of inaccuracy built into the concept of Purchasing Power Parity, but I think that gets closest to an actual protocol for relative currency valuation. The currency exchange rate should be roughly equal to ratio purchasing power that each currency represents in its home country. If you exchange your dollar for 7 yuan, then go to China and find yourself able to purchase considerably more goods than the 1 dollar would have gotten you back home, you can pretty much conclude that the yuan is undervalued. Why else are you able to get so much yuan, and thus, so much Chinese stuff for just one dollar? There will always be fluctuations, but the concept is still that the “stuff” that a dollar gets you in the US should be roughly similar to the “stuff” that the the spot exchange rate for yuan gets you in China. This has been pretty out of whack for China in the past. I think it’s been close to 1.5/1 even as the FX rate was 7 and 8/1. This should be an arbitrage opportunity, but given that the Chinese government governs the entire process of buying and selling into China, it’s tough to take advantage and the imbalance persists. People always want to cry protectionism when it comes to restricting Chinese trade, but in the face of serious currency manipulation by a hostile, communist regime, it’s really just evening the playing field.
5. The expectation that revaluing the renimbi upwards will solve US trade problems is probably nuts. A small upward revaluation will probably help. But for every good, once some other nation (which will rarely be the US) becomes the low cost provider, the (Multi-national companies) will simply swich providers and the Yuan exchange rate will be irrelevant to trade in that product. Beyond a certain point, this is a lose-lose game for the US and China.
I agree with VtCodger that the production shifts would likely flow to other developing nations. I was challenged on a few econ blogs when I stated this observation years ago. The illogical criticisms from economists and most other individuals vanished once Milton Friedman and Greenspan subsequently made statements that supported my observation.
It stirkes me that VtCodger is overlooking or not stating a larger point that focuses on the range of potential problems created by substantial concentration of global production of finished goods, components, subassemblies, and other parts which is the situation represented in China.
Floating China’s currency on the world exchange or substantially revaluing it upward internally would likely result in a partial shift of production sourcing to other emerging nations, regardless of the efforts that the Chinese central government has previously undertaken and would continue to use in order to capture and maintain its export market advantages. While such changes in production sourcing would not necessarily improve the overall U.S. import-export trade balance and current account balance, such would eliminate potential problems associated with concentrating substantial production in one nation. We’re already witnessing a shift in production from China to Vietnam.
I thought the “free market” concept on currency valuations was an artificially low currency means that the U.S. essentially gets to purchase Chinese goods for less than their “true price” (actual cost plus desired profit), which effectively is a subsidy payment by China to the U.S. So why is it a problem if China wants to subsidize the U.S. in order to support the Chinese employment/stimulus program ?
Actually.VtCodger doesn’t particularly disagree with Morici on most points although I doubt he has the slightest clue what the actual misvaluation of the Chinese currency is. But think that the idea that we can fix very much of the problem fairly painlessly (for the US) by adjusting the yuan exchange rate is probably delusional. I believe that all that will happen is that a trade problem will develop with Singapore, Taiwan, Japan, India, Somolia, and/or others of the 130 or so countries in the world that are not China. Whichever countries become the new source of US imports. Anyone care to explain why that is not the case?
BTW, is anyone aware of a “real economist” who acknowledges that 30-40% of the US trade problem is due to petroleum imports (depending on the price of crude) , and proposes actually doing something about that?
Your argument has merit. But you need to remember that the US is unlikely to be the lowest cost producer of any product imported to China other than some commodities. In fact, what the Chinese currently import from the US seems to be a few commodities and some stuff that simply is not available from anyone else. I’d like to see any evidence that the mix or amount of Chinese imports from the US would change much with any likely future exchange rate.
We need to keep in mind that economic theories about trade were developed by Europeans in situations of either trade between equals or trade between unequals where the Europeans had the advantage. The situation of trade between unequals where the Europeans are at a disadvantage would seem to be a new one. And one that is probably going to cause some rethinking.
One caution is using Japan as a example. There is a cultural peculiarity which is that the Japanese were — and probably still are — obsessed with quaility. During the boom years, American manufactured goods (other than photographic film) had acquired a reputation in Japan for being shoddy. As a result, comparatively few US manufactured/consumer goods were sold in Japan. US agricultural goods — which the Japanese probably would have bought had they been available– were blocked by various mechanisms in order to protect Japanese farmers. There are parallels between Japan in the second half of the 20th Century and China. And they probably are not accidental. But some things are going to be different.
Trains, planes, automobiles, satellites, and more…it’s just a matter of time
The scope of the problem with China’s currency peg and the vast concentration of global production, foreign R&D, and mandated technology share agreements in China is moving into the next phase.
China and its railway industry, having easily captured technologies from Japan and Germany, are going global with “their” fast train technology, and the effort includes package offers that are proving to be difficult to match by manufacturers in advanced nations. This is only the beginning of the next global trade phase to be implemented by China.
China’s shift to exporting high technology flies in the face of those economists and others who routinely underestimated the impact of allowing China entry into WTO and providing most favored nation trading status without specific requirements for a floating currency and other noted factors associated with export production. Clearly, it’s time to catch up and realize what is unfolding.
***Your post is good, up to the last point, where you make the erroneous claim that a revaluation of the renminbi wouldn’t matter.*** don
Don’t think that, and tried not to say that.
What I said was that the revaluation won’t matter much to the US. Geithner’s 3% revaluation is probably fine .. The numbers that others have suggested — e.g. Krugman 25% — are, I think, not going to have much addtional impact on either US imports or US exports other than changing which countries we import from. This is a multiplayer situation and needs to be analyzed as a multiplayer situation. If we want to decrease imports beyond a very small amount, we need to make imports from all suppliers more expensive either through devaluing the dollar realative to ALL currencies, not just the yuan. or through tariffs. If we wish to increase exports, we need to make US goods cheaper than goods of equal quality from India, the EU, etc. That would require devaluing the dollar and/or export subsidies.
Totally OT,
Does anyone know how you can see comments over at the Atlantic blogs?
Thanks
China’s high speed railway industry export program
“China has already begun building high-speed rail routes in Turkey, Venezuela and Saudi Arabia. It is looking for opportunities in seven other countries, notably a route sought by the Brazilian government between São Paulo and Rio de Janeiro, Mr. Zheng said.”
“We are the most advanced in many fields, and we are willing to share with the United States,” Zheng Jian, the chief planner and director of high-speed rail at China’s railway ministry, said.
“President Barack Obama and Vice President Joe Biden [announced on January 28, 2010] that the U.S. Department of Transportation (USDOT) is awarding $8 billion to states across the country to develop America’s first nationwide program of high-speed intercity passenger rail service. Funded by the American Recovery and Reinvestment Act (ARRA), these dollars represent an historic investment in the country’s transportation infrastructure, which will help create jobs and transform travel in America.”
“In 2008 California voters approved a $9.4 billion proposition to build a High Speed Rail [HSR] network in California. The trains will reach speeds over 200 mph. Construction may start as soon as 2011 and will take years to complete. On Jan 28,[2010] California got a $2.3 billion share of $8 billion for HSR from the American Recovery and Reinvestment Act.”
“The Chinese government has signed cooperation agreements with the State of California and General Electric to help build such lines. The agreements, both of which are preliminary, show China’s desire to become a big exporter and licensor of bullet trains traveling 215 miles an hour, an environmentally friendly technology in which China has raced past the United States in the last few years.”
“California Gov Arnold Schwarzenegger has closely followed progress in the discussions with China and hopes to come to the country later this year for talks with rail ministry officials, said David Crane, the governor’s special adviser for jobs and economic growth.”
“China is offering not just to build a railroad in California but also to help finance its construction, and Chinese officials have already been shuttling between Beijing and Sacramento to make presentations, Mr. Crane said in a telephone interview.”
“China is not the only country interested in selling high-speed rail equipment to the United States. Japan, Germany, South Korea, Spain, France and Italy have also approached California’s High Speed Rail Authority. The agency has made no decisions on whose technology to choose. But Mr. Crane said that there were no apparent weaknesses in the Chinese offer, and that Governor Schwarzenegger particularly wanted to visit China this year for high-speed rail discussions.”
“State-owned Chinese equipment manufacturers initially licensed many of their designs over the last decade from Japan, Germany and France. While Chinese companies have gone on to make many changes and innovations, Japanese executives in particular have grumbled that Chinese technology resembles theirs, raising the possibility of legal challenges if any patents have been violated. All of the technology would be Chinese, Mr. Zheng said.”
“China’s mostly state-controlled banks had few losses during the global financial crisis and are awash with cash now because of tight regulation and a fast-growing economy. The Chinese government is also becoming disenchanted with bonds and looking to diversify its $2.4 trillion in foreign reserves by investing in areas like natural resources and overseas rail projects.”
“They’ve got a lot of capital, and they’re willing to provide a lot of capital” for a California high-speed rail system, […]
This idea of coming up with a perfect measure or estimate of the ‘right’ foreign exchange rate misses the point: barring the export of some unprocessed commodity, any country building up massive forex reserves _and continuing to do so for long periods of time_ is fiddling with its currency. That’s how it works.
(And the exception for countries like Norway, etc., can be identified pretty easily, based primarily on their exports of easily-identified commodities _with little labour component in the cost of production_).
So you don’t need China to ‘revalue’ – just float its currency and stop building reserves.
***It stirkes me that VtCodger is overlooking or not stating a larger point that focuses on the range of potential problems created by substantial concentration of global production of finished goods, components, subassemblies, and other parts which is the situation represented in China.***
Ignoring/overlooking. I know it’s happening. And I think it might be a problem. But I’m not sure how big or exactly what kind of problem. It seems that making “stuff” is becoming quite inexpensive and does not require all that much skilled labor. And there seems to be concern in some corners that China has enormous overcapacity for producing just about anything manufacturable.
But I don’t see quite where that road goes to in the long run. In two decades are we going to find that ex-cannibals in Papua are assembling computers in their huts in the mountains on a piecework basis to be lugged off to Makassar for packaging then shipped off to Argentina for sale? And if so, what are the folks who used to build stuff in the US going to be doing — growing marijuana?
VtCodger,
You’re holding most of the high ground in your subsequent comments. Continue on.
There should no expectation that the majority of any production shifted out of China will flow to the U.S. or other advanced economies absent significant improvements in production processing technologies that will further eliminate large portions of labor requirements. The new Ford assembly plant in Brazil is an exception, but that plant is located in that nation only because of union labor resistance to build it in the USA.
As I have discussed with Stormy and others, there is a possibility that production shifts from China will involve subsupply sourcing by Chinese principals or subcontractors as well as manufacturers headquartered in advanced economy nations. Regardless, the net result is unlikely to significantly benefit production labor and tax revenue streams in the advanced economies.
China, though, will continue to grow its domestic government-controlled and private industries in all fields producing high technology products. It should be anticipated that China will maintain control over that production regardless of where it produces components and subassemblies. China will control the sale of those global goods at all costs in my judgment. Ultimately, China’s high technology goods will become the well protected class of production in its export platform.
China, unlike Western powers and their multinational corporations, will not bargain away their high technology.
And working at one of the new Super-Even Bigger-Plus Wal-Marts in their community. Or driving a delivery truck and cutting grass.
They may become the new pirates on and off land hijacking ships, trains, tractor trailers, and FedEx trucks. USSR+Somolia.
VtCodger – “That would require devaluing the dollar and/or export subsidies.”
Those measures would work, though they are not the only solutions available.
Switching to VAT will immediately improve the profitability of U.S. exports based on existing WTO rules regarding taxation which favor member nations that employ the VAT. As such, U.S. exporting corporations and companies could reduce their unit or bulk pricing by substantial margins in order to compete globally and still maintain existing or improved net profit margins. Switching to a 15% VAT rate, as an example, in the USA would serve as a major export competition tool that is presently not in the toolbox.
The Asian Development Bank cites a study in its most recent Asian Development Outlook report released Tuesday that supports Peter Morici’s claim of China’s undervalued currency. The study says China’s currency is undervalued by 40.7%; Morici says 40%.
ADB Calls For Asia FX Flexibility, Warns On Cap. Flow Risks
Tuesday, April 13, 2010
BEIJING (MNI) – The Asian Development Bank called Tuesday for increased foreign exchange rate flexibility and less currency market intervention, warning of the dangers posed by short-term capital flows into the region.
“Reducing the excessive rigidity imposed by heavy foreign exchange market intervention would allow exchange rates to move more in line with their fundamentals, and help economies rebalance demand toward domestic sources,” the Manila-based multilateral lender said in its latest development outlook.
“Too much foreign exchange intervention could lead to serious repercussions of macroeconomic management in the region, especially risks emerging from exchange rate misalignments.”
Although the bank appeared careful not to single out the yuan, it did cite a study showing the Chinese unit to be the most undervalued regional currency, by some 40.7%. The ADB said that countries should work to ensure that their currencies move towards their equilibrium rates and cut down on intervening in the markets.
“The intervention should be done to mimic the equilibrium exchange rate of a well-functioning market, not override it to produce a nonequilibrium exchange rate,” it said.
The perception of widespread currency undervaluation has helped fuel a massive influx of short-term capital flows into the region. The ADB singled out the 50% year-on-year surge in property prices in cities on Hainan Island in southern China as well as the 28% jump in Hong Kong housing prices.
“Abrupt surges in short-term capital inflows (a dominant feature of speculative capital) pose substantial risks to an economy, including excessive liquidity, economic overheating, asset price bubbles, and overall financial fragility,” the report said.
“Yet if the central bank attempts to head off these risks, usually by sterilizing the inflows, this eventually induces significant real exchange rate overvaluation.”
Market News International Beijing Newsroom +86-10 5864 5241
http://imarketnews.com/node/11654
—–
The ADB report:
Asian Development Outlook 2010: Macroeconomic Management Beyond the Crisis
April 2010 (released on Tuesday, April 13)
http://www.adb.org/Documents/Books/ADO/2010/default.asp
The Asian Development Outlook, popularly known as the ADO, is a series of annual economic reports on the developing member countries (DMCs) of the Asian Development Bank. The ADO provides a comprehensive analysis of macroeconomic and development issues for the DMCs of ADB.
—–
Another article:
Asia warned of risk of forex intervention
By Kevin Brown in Singapore
April 13 2010 03:06
http://www.ft.com/cms/s/0/1559f2c8-4613-11df-8769-00144feab49a.html
*You may have to type the article title into Google or another search engine to reach the full text.
**An excellent read, focusing attention on problems with FX rates in other Asian nations.
***So you don’t need China to ‘revalue’ – just float its currency and stop building reserves.***
The Chinese problem with that appears to be something one wouldn’t expect. They claim that following that course is what caused Japan’s massive equity and real estate booms fueled by foreign money in the 1980s and the 1990 blow off in Japan. I have no idea if they are either sincere or correct. But there is just enough substance there that one can’t really ignore it.
They also claim, and it’s hard to argue with them, that they US trade deficit is caused by our failure to save, not their actions. Basically they are only the cheapest drug dealer in a neighborhood with a lot of dealers, not the cause of our addiction.
Yes, China is seriously involved in high speed rail and pebble bed nuclear reactors. They are also designing a medium range passenger aircraft to compete with Aerobus and Boeing. When you think about it, they have a quarter of the world’s population, a decent education system, and are awash in investment capital that does not have to be borrowed from overseas.
WRT to high speed rail, the US has spent seven decades destroying a reasonably efficient and effective passenger rail system through a possibly less than brilliant strategy of taxing rail lines while massively subsidizing air and auto travel. It should probably come as no surprise that the only North American player in the high speed rail game is Canadian — Bombardier. (I vaugely think GE and Boeing may have some capability as well).
The bright spot is that most of the cost of HSR will probably be track acquisition and improvement rather than the gear that runs on the track, and the trackage money will probably be spent in the US.
As for the lack of US High Speed Rail capability — well, that’s what happens when your national policy is to give priority to weapons systems, pointless wars and a poorly conceived and not especially well executed manned spaceflight program.
vtcodger,
“I believe that all that will happen is that a trade problem will develop with Singapore, Taiwan, Japan, India, Somolia, and/or others of the 130 or so countries in the world that are not China. Whichever countries become the new source of US imports. Anyone care to explain why that is not the case?
“
Greenspan made that point early in the decade, then moved on assuming the problem was solved.
I have been mulling it around in my mind since then.
I do have a hypothisis on that finally. Start with the assumption that China really does not want to buy anything from the US (outside of wheat and forbidden technology), and is trying to make everything themselves, and enter exports markets with everything.
The result is all the money from the entire world flows to China. This is pretty close to what happened. (except for oil, but one problem at a time)
Now say we cut off Chinese imports somehow thru price adjustment, i.e., currency re-val, import duties, Chinese carbon tax, unemployment insurance, take your pick.
Both Multi-National and Chinese corporations begin shifting factories to other “develeloping” countries.
The US still has a trade deficit, but it is distributed more evenly around the world. The kind of goods the US exports (outside ag products) are more likely to be sold to government and corporate customers, not poor consumers. We potentially end up with an export market that could grow because US exporters have more foreign governments and corporate customers to sell to besides the one unwilling customer, China.
The other thing to consider is China is gutting manufacturing from Mexico too, and I don’t think we want a bankrupted state on our southern border, either.
So I think this scenario is still an improvement over following the path we are on.
***but in the face of serious currency manipulation by a hostile, communist regime, it’s really just evening the playing field.***
Are you seriously suggesting that the People’s Democratic Republic of Chinese is any more communistic than it is democratic? That’s a capitalist economy if ever the world saw one. Managed, yes. Communist, not hardly.
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Using PPP to compare exchange rates is an interesting idea. But I don’t think it will work except between very similar countries e.g. US vs Canada. The problem of course is that the average Chinese surely buys a very different mix of products than the average American. For example, the price of a gallon of gasoline is far more important to an American (765 motor vehicles — mostly personal cars — per 1000 population) than a Chinese (69 vehicles — far higher percentage of trucks, motorcycles and motor scooters — per 1000).
Here’s an article on the subject (which, unfortuanately does not rank the Yuan) http://fx.sauder.ubc.ca/PPP.html
http://en.wikipedia.org/wiki/List_of_countries_by_vehicles_per_capita
Value Added Taxes as an export subsidy. Yes … maybe … probably, but I’ve never really encountered the concept before. I will mull it over for a few weeks/months.
I’m afraid you are mostly talking around points raised, rather than addressing them. You make what is essentially a “dead white guy” argument about economi “theories”. There is nothing formulaic or abstract – not much theory – in expecting people to repond to prices when deciding what to purchase. You caution against using Japan as an example, then set about using Japan as an example. When does the Japanese example fall in bounds, when out? Seems to fall out of bounds when cautioning me, in bounds when used by you.
You also focus very much on one side of the issue. Will China buy our stuff? If the price of Chinese goods rise, we will probably buy less of China’s stuff. That, by itself, will help reduce the bilateral deficit, and given that the bilateral deficit with China (year to date, 2010) represents 48% of our total trade deficit, a decline in our deficit with China would very likely reduce our deficit overall.
Yes, China has tools beyond its FX regime for skewing its trade balance toward surplus. It seems unlikely, though, when a big part of China’s economic structure at the border is aimed at generating surpluses – one of those parallels with Japan that you seem to allow – that the FX regime is neutral to China’s trade balance.
What we have here is a variant of that old T-shirt slogan. “Eat More Sheep – 10,000 Coyotes Can’t Be Wrong”. Countries wouldn’t engage in beggar-thy-neighbor trade policies if they did not work, though they often work in harmful ways. Is it likely that all those countries in the 19th and 20th century that tried to jigger their exchange rate to accumulate gold were wrong, Krugman is wrong, the IMF is wrong in maintaining rules against using FX rates for trade gain, while you are right, wthout offering any substance beyond a couple of “probably”s and one “nuts”? It is not at all cleary from what you have written why you think what you think. All we know is that you think it.
It is not at all hard to argue with them on this point. It is, in fact, hard to sit still for that sort of assertion. The whole savings argument comes down to arbitrarily picking some point in the flow of money and goods and claiming that one part of the mechanism is the driving force, everything else is just passive. Without evidence. Saying that if China didn’t do what it is doing, some other country would, assumes that each of those other countries can coordinate activity on a global scale – that doing so is affordable to smaller economies in the same way it is to China.
In fact, I think there is something a little quirky about an argument liberally sprinkled with assumptions that things would turn out pretty much the same for the US even if they changed radically for other participants, and also sprinkled with standard, gratuitous slaps at those economists and their assumptions.
So, we imagine that the most profound development in international economics in decades – China’s development as an exporting giant – is altered by China moving to export a smaller share of GDP, and that everything remains mostly the same for the US? The rest of the world absorbs the entire change? The rest of the world responds to new conditions, but the US does not> We imagine that a small change in exchange rates can have a significant impact, but that a larger change can have no significantly larger impact? I write “we imagine”, but you know that really means “we assume”?