Editorial boards as philosophers
The New York Times published an editorial entitled “Return of the Killer Trade Deficit” on August 16. This is not the first time an editorial in the New York Times has reminded me of French philosophers. Like the philosophers, the Times editorial board, especially in this editorial, pretends to be profound and authoritative. Yet, when you cut through their respective pontifications, you realize that neither has really said much of importance.
The editorial emphasized that “China is mopping up demand everywhere you look with its artificially cheap supply of goods. Germany, the world’s other exporting power, is cutting its budget and relying on foreign demand to drive its economic rebound.”
The editorial added: “As Germany and other rich countries in Europe start slashing their budgets and the world economy slows, the United States…has been left as a lone source of demand growth. Meanwhile, Beijing’s reluctance to end an economic strategy based on cheap exports is cementing its position as the world’s demand hog.”
The editorial board rejected punishing China by enforcing existing trade laws. Instead, the NY Times called upon China and Germany to stimulate domestic demand and reduce their reliance on exports.
There are too many flaws in the editorial and too little space to comment on all of them. So I will highlight the most egregious ones.
For starters, the US trade deficit never went away. Both France and the UK have large trade deficits as well, so they are not trying to ride the coattails of the US.
The trade data cited in the editorial suggest that China runs a trade surplus only with the US, and a balanced position with the rest of the world. Thus, it cannot be “mopping up demand everywhere.” Furthermore, it is not China’s currency alone that appears to be undervalued relative to the US dollar (however one determines whether a country’s currency is over or undervalued). The US dollar might be overvalued relative to all currencies. Hence, an appreciation of the renminbi might do little to improve the US trade balance. (The renminbi did appreciate by 19% against the US dollar between 2004 and 2008, yet the China’s trade surplus with the US did not decline).
The US has been running a large trade deficit for a few decades, so this is a problem that predates China becoming a major player in the global marketplace. And at this time, much of what China exports to the US would not be repatriated to US factories if the renminbi appreciated by 50% or more in the next six to 12 months. The production would shift to other low cost locations, and the threat of deflation would vaporize as US consumers faced much higher prices following the production shift.
The real threat to the US economy lies ahead as China and several other Asian countries try to move “up-market”. If they have any success, they will create serious competitive problems for US-based manufacturers. Moreover, if they have any success, it will be because they engaged in many policies that violated the GATT. Consequently, trade wars might be inevitable and necessary if the the legal structure governing global trade is to be effective. Otherwise, there will be an increasing risk of the return of the beggar-thy-neighbor policies which inflicted much economic damage in the 1930s.
The US should start retaliating now — by firing some salvos across the bow of the Chinese juggernaut, a more serious and destructive trade war might be avoided, contrary to the beliefs of the New York Times. Talk is cheap, and oftentimes, actions speak louder than words. The NY Times continues to believe only in talk.
The editorial did not point out that the US runs a trade deficit in oil that in most years is larger than the deficit with China. While the deficits with China have played a role in moderating inflationary pressures in the US, the same cannot be said about the trade deficit in oil. Yet with the exception of Tom Friedman and periodically Paul Krugman, no one else at the New York Times has come out emphatically in favor of a massive carbon tax. This tax would accomplish many very useful obejctives, among them helping the poor in India, China and Africa when crude oil prices collapse.
China has been doing much to stimulate domestic demand, but the country is still too poor to be the growth engine for the world.
German companies have been very successful exporting their products because they have been innovative and focused on quality, lessons US companies should learn. Should these companies now abandon their competitive advantages and refrain from building new advantages in order to placate the NY Times?
China, Germany and other countries will continue to do what is in their best interests and will not be prodded by the Times to change their behavior. The only recourse for the US is to vigorously enforce trade laws; spend money wisely in the future, focusing on public transit, urban infrastructure, digitizing health records and education; and change corporate governance practices so that effective boards compel companies to become more innovative and competitive.
The views expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.