US-China Trade Deficit: Krugman v. Krugman
Paul Krugman is really worried about the US-China trade deficit and global trade imbalances more generally. He has now devoted two near-identical NYT op-eds to the issue, each essentially complaining that it's all China's fault. Here's the latter Krugman column on the subject:
Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak. They’ve done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities.
And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.
What makes China’s currency policy especially problematic is the depressed state of the world economy. Cheap money and fiscal stimulus seem to have averted a second Great Depression. But policy makers haven’t been able to generate enough spending, public or private, to make progress against mass unemployment. And China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.
But why do I say that this problem is about to get much worse? Because for the past year the true scale of the China problem has been masked by temporary factors. Looking forward, we can expect to see both China’s trade surplus and America’s trade deficit surge....
Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.
And I’m not sure the Obama administration gets it, either. The administration’s statements on Chinese currency policy seem pro forma, lacking any sense of urgency.
That needs to change. I don’t begrudge Mr. Obama the banquets and the photo ops; they’re part of his job. But behind the scenes he better be warning the Chinese that they’re playing a dangerous game.
As Dan Drezner humorously points out, Krugman wrote the "exact same column" last month (that's nice work if you can get it). In each case, he blames global macroeconomic imbalances on China's currency policy, and his recipe for reducing, or "re-balancing," the US-China trade deficit rests solely on the appreciation of China's currency against the dollar. Such appreciation, so the theory goes, would make US goods relatively cheaper (especially as the Dollar declines against other currencies too) and Chinese goods relatively more expensive, and the trade deficit will magically shrink. Presto!
For the time being, I'm going to put aside my doubts that the US-China trade deficit is the big problem right now. I'm also not going to focus on the historical evidence (pointed out by me and a few others) that currency appreciation - including the RMB's - hasn't "cured" past trade imbalances. Instead, let's just look at Krugman's theoretical argument that currency policy alone can "fix" the trade deficit. Is that sound liberal economic theory? Coming from a famous liberal columnist and Nobel Laureate in trade and economics, one would sure assume so.
Well, as my mom would say, you know what happens when we assume, now don't you?
