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