Krugman made a name for himself challenging the very assumption that free trade always leads to mutually beneficial outcomes. If you want to take him on with regard to trade theory, you can't simply respond with the original orthodoxy that protectionism is bad and free trade is good. You'd have to address his specific arguments about economies of scale and the possibility of being "locked-into" a bad trade situation (at a local maximum).
It is not in the US best interest for China to release the yuan. If that were to happen, the buying power of chinese holders of the yuan will increase to the point that their demand for goods will compete with the U.S. demand for goods. As the dollar declines, American buying power will also decline, as will american "quality" of life.
More expensive chinese goods will not lead to more american manufacturing. Instead, it will lead to more Indian. Pakistani, Bangladeshi manufacturing. A more valuable yuan will be a short term fix -- if it is a fix -- which I don't believe it is.
If the yuan is released, the dollar will cease to be the world reserve currency in an economic blink of an eye. While it is fixed, there's no reason to switch from dollars to yuan, but as the yuan begins to climb, fewer and fewer banks or even individuals will want to hold the dollar and our savings will dwindle due to the massive inflationary effects.
The U.S. consumer of goods -- all goods -- not just "cheap chinese crap," buys most of their stuff from overseas. Many asian countries and south america are huge suppliers of electronics, textiles and food. 1.5 Billion people in china also need to eat and when they can pay 150% in the exporters' local currency relative to what american retailers can pay, why would they bother shipping those goods across an ocean? Why wouldn't south america send their ships to asia instead of Los Angeles?
The only solution to this problem is for America to stop needing the plastic fix. They need to start saving their money, investing their money, and producing goods the rest of the world wants to buy. There is no other solution in a global economy.
Protectionism won't work. Complaining won't work. Badgering China to deflate the yuan won't work.
"While it is fixed, there's no reason to switch from dollars to yuan, but as the yuan begins to climb fewer and fewer banks or even individuals will want to hold the dollar and our savings will dwindle due to the massive inflationary effects. "
Actually, this speaks to me personally. The yuan is not really fixed to the dollar permanently - it's been climbing gradually over the past several years. As an American in China, I have done just as you have said - I've gradually moved as much of my cash to RMB as possible and enjoyed each time the gov't raised my purchasing power back home. As I now operate a business here and am paid in RMB, I personally look forward to it happening again in the near future.
Also, I think, at least in the short term, you are right. Increasing the value of the yuan will noticeably damage the average Joe's quality of life back home. All those little 'made-in-China' things that you buy without even noticing will suddenly become more expensive. Which means you will get less of them. Which means you will have less of the stuff that you are accustomed to having.
In the long term, I think a floating Yuan is probably healthy for all parties involved - for the US, because some of the imported Chinese goods will be produced back on home soil and for the Chinese because it will foster more domestic, service-oriented consumption (i.e., a modern economy).
We're just pinballing around looking for a silver bullet here. The reality is we save and invest too little and purchase too much from abroad.
Like fnid says, the way to address the problem is a function of changing American behavior and increasing the value of our exports while saving more. This requires us to put off consumption in this generation for the benefit of the next one--sadly, this is the last thing Americans are going to sign up to do, ergo the search for a magic quick fix.
The Chinese response to a "surcharge" seems pretty obvious. China does purchase a lot of US exports--they're financial products aka Treasuries. America needs China to keep buying this to keep its whole leveraged jenga-stack of an economy intact. Devaluing US debt would hurt China, but it would hurt the US a lot more.
Which Krugman is talking is usually an important distinction... brilliant economist Krugman or OpEd/best-selling author Krugman?
John Mauldin made a much better analysis of this. If we charge a tariff on China, will it really improve our trade deficit so much that our goods will be from Vietnam, Indonesia or [other country here]?
I suggest that anyone skeptical of this should go to their local mall and stop by a few clothing stores, like the Gap, Old Navy, AE, Banana Republic, etc. What you'll find is interesting. At the lower end shops (like the Gap and Old Navy), a lot of the merchandise is no longer made in China. But in higher end shops (like the Banana Republic), it still is.
I thought this was fascinating for different reasons than my mother (who discovered it), because you can see quite clearly, right there in the mall, that the economics is working, and China isn't some magical demon that can somehow keep on producing the cheapest. It's already cheaper to produce in El Salvador and Vietnam than it is in China.
Moreover, if you impose a tariff, then we'll just be buying crap from those other countries, which isn't going to help our trade deficit and our economy, and will likely start a trade war, which will in likelihood hurt our economy. Think about China pressuring everyone in their neighborhood to buy Airbus instead of Boeing.
Think about China pressuring everyone in their neighborhood to buy Airbus instead of Boeing.
Bad example: 51% of the sub-assemblies in the Airbus 380 super-jumbo are made in the USA. Meanwhile, around 51% of the sub-assemblies in the Boeing 787 are made ... guess where?
(The Boeing/Airbus cross-subsidy cat-fight in front of the WTO has been going on for about two decades now, and both sides are (a) firmly entrenched and (b) have been working for years on "poison pill" policies to deter both the USA and the EU from slapping an embargo on the rival manufacturer.)
One of the side-effects of the current free trade regime (and, importantly, our vastly improved global communication infrastructure) is that it becomes much harder for countries to haul up the trade barriers because complex fabrications come from non-obvious places. (Another random example: the best-selling Japanese SUV in the UK, the Nissan Qashqai, was designed in, and is largely manufactured in ... England.)
> Unlike Britain, America doesn't really do free-traders
Seriously? America effectively invented modern neo-liberalism, and exported it abroad via international agreements (WTO, NAFTA, IMF loan agreements...)
> China makes an easy scapegoat for America's ills, but it is not the cause
The author makes this point but provides nothing to back it up. I could totally understand the argument that China helped induce the recession through cheap loans. I could also buy the argument that it didn't given a well-reasoned argument. Give me something to chew.
I'm not the biggest Krugman fan, but this article is all bark and no bite.
The US is still a largely internalised, self-reliant economy for which trade with the outside world is relatively unimportant.
Unfortunately, the article seems to omit the extraordinary evidence to support this extraordinary claim, seeing as there's likely more than enough evidence to the contrary sitting on the author's desk, inside it, under it, scattered about his office, and on his very person if he would check the country-of-origin tags.
Since markets hate uncertainty, then why not say, "in one year if the valuation of the Chinese currency isn't fixed, we will impose a surcharge.". There is no reason why this would have to be a sudden move. This would let manufacturers figure out a backup plan, and still put plenty of pressure on Beijing.
a) The Telegraph is a tabloid, why not link to a better news source?
b) There is precedent for this sort of move, as Krugman's original article said it was done in the 70s with Germany and Japan until they raised their currency values.
Is it a good idea? It's probably a bit risky but it's got to be better than letting China continue to manipulate currency and be a drag on the rest of the world's economy. I imagine a tariff that large would probably get them to float the renminbi fairly quickly.
// Edit: I take back the tabloid comment, I was thinking of the Aussie Telegraph which is absolutely a tabloid. My point still stands, that what China is doing needs to be dealt with and that it's hardly the end of the world to put tariffs on them.
The Telegraph is not a tabloid, in either spririt or actual form factor. In fact, it's the only British daily remaining that is available exclusively in broadsheet.
Manipulating a currency takes a lot of money. They will not be able to keep it up indefinitely unless they start inflating the money supply. That will not be passable for the general populace, and thus they will have to go off the peg when that happens.
The best scenario is a slow unwinding which happens gradually and lets both the chinese and the american economies to adjust slowly.
Creating a trade war on the other hand would make it all happen at once, meaning that the chinese exporters and the american consumers both must adjust ALL AT ONCE. This during a big fall in global trade. This will work .. less than stellar.
Jeremy Warner simply doesn't understand the issues at the depth Krugman does. Doing nothing threatens the world much more than a surcharge to offset the renminbi.
It is correct that the economics prize was not endowed by Alfred Nobel's will, as were the prizes in physics, chemistry, medicine and physiology, literature, and world peace.
There is a subtle difference in the formal title of the economics prize, but the Nobel Foundation reports information about the economics prize on its website.
Kindly direct your eyes to the first sixteen words of that entry...
The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics...
...and tell me how this supports the assertion that there is "no such thing". When I read further in the entry, I see that, while it wasn't established by Alfred's will and is known more formally by a longer name, there is in fact such a thing and that the recipients are selected by the same royal swedish academy of sciences, and "in accordance with the rules governing the award of the Nobel Prizes instituted through his [Alfred Nobel's] will".
Maybe you meant to make a different point, like whether or not the most recent laureate was deserving of the recognition? Or maybe you're just engaging in obscene acts of silly pedantry over the commonly accepted shorthand name?
Either way, I was tossing you a link so you could take your existential claim to the denizens of wikipedia and get the entry removed. I'm sure they would love to hear from you.
Krugman made a name for himself challenging the very assumption that free trade always leads to mutually beneficial outcomes. If you want to take him on with regard to trade theory, you can't simply respond with the original orthodoxy that protectionism is bad and free trade is good. You'd have to address his specific arguments about economies of scale and the possibility of being "locked-into" a bad trade situation (at a local maximum).
There's a little bit about it here: http://en.wikipedia.org/wiki/Paul_Krugman#New_trade_theory