Roach: GD II awaits if China bashing rhetoric turns into protectionism

Stephen Roach is pulling no punches now. After quipping "I think we should take the baseball bat out on Paul Krugman regarding pro-protectionist statements Krugman made earlier this month, Roach has launched a blistering attack on the protectionist rhetoric in America. In an opinion piece released today in the Financial Times, Roach blamed America’s problems on a deficit of savings and warned "scapegoating of China could take the world to the brink… [of a crisis which] would make the crisis of 2008-09 look like child’s play."

Of course, Roach is entirely correct. The United States has been living beyond its means for a generation, running up enormous private sector debts and running large current account deficits as investment outstripped savings.  America’s problem is America, not China.

Singling out economists giving intellectual cover to the protectionism, Roach says:

America’s fixation on the “China problem” is now boiling over. From Google to the renminbi, China is being blamed for all that ails the US. Unfortunately, this reflects a potentially lethal combination of political scapegoating and bad economics…

With China and its so-called manipulated currency having accounted for fully 39 per cent of the US trade deficit in 2008-09, Washington maintains that American workers can only benefit if it gets tough with Beijing.

However appealing this argument may seem, it is premised on bad economics. In 2008-09, the US had trade deficits with more than 90 countries. That means it has a multilateral trade deficit. Yet aided and abetted by some of America’s most renowned economists, Washington now advocates a bilateral fix – either a sharp revaluation of the renminbi or broad-based tariffs on Chinese imports.

…Unless the problems that have given rise to the multilateral trade deficit are addressed, bilateral intervention would simply shift the Chinese portion of America’s international imbalance to someone else. That “someone” would most likely be a higher-cost producer – in effect, squeezing the purchasing power of hard-pressed US consumers.

The US would be far better served if it faced up to why it is confronted with a massive multilateral trade deficit. America’s core economic problem is saving, not China. In 2009, the broadest measure of domestic US saving – the net national saving rate – fell to a record low of -2.5 per cent of national income.

And as I wrote in a recent post, Americans are now back to the overconsumption norm. Absurdly low interest rates are a main source of excess household sector consumption in the United States. However, with the US economy still in a fragile state, the Federal Reserve is unlikely to raise rates anytime soon. So what can US policy makers do?

Look for scapegoats, it seems. Nevertheless, the bankruptcy of this approach should be evident given the large bilateral trade deficits the U.S. has with Germany, Japan and much of Asia. As Roach points out, the US has a multilateral problem as it is in deficit with 90 countries around the world.  The Chinese are now indicating they may even fall into deficit with the US this month. These imbalances are certainly not about China. They are about the U.S.

As for protectionism, Michael Pettis makes very good points when dissecting a recent US-China Business Council report. They validate Roach’s view that tariffs would just shift the US deficit to other producers. Pettis says:

The failure to recognize that adjustments are more likely to occur via shifts in multilateral trade than shifts in bilateral trade is, I think, the basic problem…

…A shift in the terms of the trade between the two countries, whether caused by tariffs or caused by revaluation, can also tilt the balance in both countries between consumers and producers, and this will affect both countries’ trade accounts.  Basically, if the cost of US imports rises, Americans will reduce overall consumption and shift their consumption behavior, and this can directly affect American producers.

It is not that specific goods or services that once came from China and delivered to the US now come from Mexico or even Germany. It is that trade IN AGGREGATE moves away from China and toward other nations. Because of the exchange rate, individual companies making specific decisions would start switching trade relationships that in aggregate and on a multilateral basis decrease the bilateral trade imbalance between the U.S. and China.

The tariffs or exchange rate change do not necessarily change anything about the US’s own aggregate trade imbalance except that the protectionism transfers wealth from domestic consumers to protected producers and decreases consumption demand. This is one reason why protectionism doesn’t work.

But the most important reason that protectionism is poison is retaliation. What is good for the goose is always good for the gander. Tariffs, export quotas, subsidies, competitive currency devaluations via quantitative easing and low interest rates and the like all serve to erode the collective sense of mutual dependence. It ends in the kind of spectacle we witnessed in the 1930s with protectionism as a major contributor to economic and social upheaval which ended in a long depression and world war. I hope we can avoid a similar fate but this has been brewing for a very long time.


Blaming China will not solve America’s problem – Stephen Roach

  1. Stevie b. says

    Ed – i’m confused by a couple of things in this post.

    1/ Roach – “China and it’s so-called manipulated currency”

    But it HAS been manipulated, hasn’t it?. What other major independent trading economy/economic bloc has unilaterally fixed its currency to another major independent one?
    In the unlikely event that the $ actually stays the best/strongest of all evils by dint of the others actually being worse, maybe the bonus will be the resultant pressure on the Chinese to rethink the peg.

    2/ ” The Chinese are now indicating they may even fall into deficit with the US this month”.
    And you don’t think this is conveniently manipulated too?

    1. Edward Harrison says

      The US has been living beyond its means for a generation. To go blaming China for a mess made in America misses the point. America need to take responsibility for blowing bubbles and overconsumption.

      Certainly China’s economic policies need to change. And yes I do think the currency is a problem. And I do think the trade data sounds fishy.

      But, pointing the finger at China may feel good, but it’s not going to solve America’s many problems. It’s as simple as that.

      1. Stevie b. says

        Ed – we’ve been in total agreement about the US living in a fool’s paradise, but ably aided and abetted by the symbiotically convenient Chinese relationship, which means IMO that China has a fair share of the blame.

        It’s been too easy and irresistable up til now for everyone to take this easy way out, such that it’s not just a US problem any more that the US alone can solve. China has been belatedly finally fingered as a real part of the problem and needs to be part of a solution that involves a fair share of adjustment on all sides – sadly easier said than done perhaps.

        1. Edward Harrison says

          American policy makers have been blaming Asia all along the way. That has been the modus for the whole time. It’s not something new. Remember the savings glut debates from this time last year?

          They were just another example of US policy makers pointing the fingers at others rather than fixing their own problems. In this particular downturn, I fault the west, and the US in particular, for starting this blame game. Now everyone is at it.

          Stevie, you forget the points I made a few weeks ago that a politicized debate about economic problems spells disaster:

          The US needs to stop blaming people and concentrate on creating jobs and reducing debt.

        2. Stevie b. says

          Ed – I didn’t appear to have the option of responding directly to your last comment (the one with the 2 links) which I assume is now below – so apologies if i’ve messed-up the order. Anyway:

          I’m certainly not blaming Asia/the Chinese without including the US/UK/EU etc. My memory’s failing me a bit in my dotage, so I re-read the “politicization” post as it applied to China.
          Politicians may eventually find it irresistable to choose the path of least resistance if there is no movement from the Chinese, but I still think that pegging the RMB to a now stronger $ is helping to solve some of the problem for some of the countries involved, obviously excluding the US – such that to change just one letter of one of your highlighted links, “the weak renminbi is now just America’s problem” because the $ is the last meaningful western currency against which the “weak” RMB has not strengthened. Now that the Chinese have stockpiled commodities galore, being pegged to a “strong” $ may well soon lead to greater pressure on (and less resistance from) the Chinese to unpeg towards a basket of some sort, such that everyone will hopefully still gain a bit – buying time for things to muddle through for a while longer, which is probably the best we can hope for for now.

          The world is now so inter-connected that I just can’t see how the US can solve it’s problems and create jobs willy-nilly (and decrease debt too) without at the same time engaging the clear self-interest of the Chinese in correcting global imbalances in order not to upset the whole applecart.

        3. Stevie b. says

          “such that everyone will hopefully still gain a bit” – sorry, should have added “if the $ eventually weakens” – which is not much of a stretch really in the race to the bottom of the currency pile.

  2. js says

    History has a nasty habit of repeating itself.

    China’s economic policy is suspect and China’s labor laws are very much below what they should, the US can not blame China for all of its problems.

    Debt is the problem, as it was in the 1920s. People are spending too much money they don’t have. Buy now pay later.

    We certainly are going to pay later. Edward, you are spot on with this article. The US is only going to fix this problem through internal reform and a supportive society who sees the problems and mistakes they made and resolve to fix them without blaming other people or countries.

    Besides, if we stand here and blame China, who is next? Mexico? Canada? Germany? Let us not forget that the United States relies on the natural resources and skills of many other countries and by firing up a good old fashion trade war the US will suffer as much as the other countries involved.

    World trade needs to be reformed, but only collaboratively. It certainly isn’t fair that products built in China do not have to be produced to the same labor laws or environmental law as they do in the US or Germany.

    Unfortunately I think this problem already has been written in the history books once before and we know how this problem is going to play out.

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