New Haven
ON Wednesday, the House of Representatives is set to pass legislation that would allow trade sanctions to be imposed on China as compensation for its supposedly undervalued currency. This vote comes a week after President Obama, in a private meeting with Prime Minister Wen Jiabao, was reported to have made it very clear that the United States is, indeed, prepared to take forceful actions if China doesn’t budge on this critical issue. Unfortunately, forcing such a currency realignment would be a blunder of historic proportions.
In a recent meeting with Mr. Wen in New York, I framed the dispute between our two nations in a very different light. The gist of what I told him is this: The economic tensions between the United States and China arise because of two things we have in common.
First, there is our shared fixation on jobs. In the United States, we continue to struggle with high rates of unemployment and underemployment. In China, policymakers continue to worry about what they term “social stability” — that is, full employment, absorption of surplus rural labor and reduced inequalities consistent with their aspirations for a “harmonious society.”
Second, for both China and the United States, there are major imbalances in the percentages of gross domestic product devoted to exports, investment, consumption and savings.
These joint concerns have resulted in serious tensions that must be resolved. There are, however, two very different potential strategies to address these tensions: a major currency realignment, favored by many in the United States, or structural policies aimed at increasing China’s internal private consumption.
The currency fix won’t work. At best, it is a circuitous solution that would address only one of the many pressures shaping the imbalances between our two nations; at worst, it would lead to a trade war, or risk jeopardizing China’s understandable focus on financial and economic stability.
Besides, in a highly competitive world, there are no guarantees that currency shifts would be passed through to foreign customers in the form of price adjustments that might narrow trade imbalances. Similar fixes certainly didn’t work for Japan in the late 1980s, and haven’t worked for the United States in recent years. We’ve allowed the dollar to fall 23 percent — in inflation-adjusted terms — from its early 2002 peak, against all of our trading partners; we did this in the hopes that a weaker dollar would stimulate exports and domestic production. Yet America continues to struggle with high unemployment and stagnant wages, and now has trade deficits with 90 countries around the world.
This latter point underscores the danger in politicizing this debate. Contrary to accepted wisdom, America does not have a bilateral trade problem with China — it has a multilateral trade problem with a broad cross-section of countries.
And why do we have these deficits? Because Americans don’t save. Adjusted for depreciation, America’s net national saving rate — the sum of savings by individuals, businesses and the government sector — fell below zero in 2008 and hit -2.3 percent of national income in 2009. This is a truly astonishing development. No leading nation in modern history has ever had such a huge shortfall of saving. And to plug that gap, we’re left to borrow and to attract capital from lenders like China, Japan and Germany, which have surplus savings.
If Washington were to restrict trade with China — either by pushing the Chinese currency sharply higher or by imposing sanctions — it would only backfire. China could very well retaliate against American exporters, and buy goods from elsewhere (a worrisome development in what is now America’s third-largest export market). Or it could start to limit its purchase of Treasury securities.
The United States would then have to turn to some other nation or nations, at a higher cost, to finance our budget deficits and make up for our subpar domestic savings. The result would be an even weaker dollar and increased long-term interest rates. Worse still, as trade was redirected away from China, already hard-pressed American families would be forced to buy products that are noticeably more expensive than Chinese-made imports.
But Washington remains unwilling to address our unprecedented saving gap, and instead tries to duck responsibility by blaming China. Scapegoating may be good politics, but proposing a bilateral fix for a multilateral problem is just bad economics.
Stephen S. Roach, a senior fellow at the Jackson Institute for Global Affairs at Yale, is the non-executive chairman of Morgan Stanley Asia.
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