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Posts Tagged ‘China’

Squeezing a Balloon

September 26, 2019 Leave a comment

Via the Financial Times I have read the Asian Development Bank Asian Development Outlook 2019 Update. The outlook has an interesting section on the impact of the US-China trade war on the region. Let me simply quote the relevant paragraph: “Recent trade data also provide evidence of trade redirection. In the first 6 months of 2019, US imports from the PRC fell by 12% from the same period in 2018. At the same time, US imports from the rest of developing Asia rose by about 10%, with notably large increases of 33% for Vietnam; 20% for Taipei,China; and 13% for Bangladesh” (page 14). I also copied and pasted the figure in the following page:

This was to be expected. Of course trade diversion is not automatic, nor costless. Supply chains need to be reorganized, bottlenecks may appear. But it is obvious that as long as US demand for the goods produced abroad remains strong, if the price of these increases in China, the demand will look elsewhere. Now, the US has been recording substantial negative net lending (the sign of an excess of domestic demand over supply) since at least the early 1990s:

The source of this excess demand has not always been the same. Sometimes corporations, rarely households (most notably in the run-up to the crisis), and most of the times the government.

In particular, in recent years households have experienced excess savings, initially joined by corporations which then gradually went to equilibrium. The government is keeping demand high, and as a consequence the trade deficit alive.

The tariffs on China, in this context, are just like squeezing a balloon. As long as US domestic demand remains strong, compressing Chinese imports simply pops imports from Vietnam, or Bangladesh, or who knows what other country next. As long as American excess demand will persist, somebody elsewhere will provide the supply for it. Reducing bilateral trade deficit with China is not a solution to persistent excess domestic demand.

Of course, the US could impose barriers to imports from all countries. This would solve the problem and reduce the trade deficit. Higher import prices and competition between households, firms and the government, would reduce purchasing power and, together with excess domestic demand, the welfare of American voters. Mr. Trump should try this before November 3rd, 2020.

And I Thought I was the Gloomy Economist…

June 14, 2012 Leave a comment

Give a look at Dani Rodrick on Project Syndicate (in a number of languages). The scary thing is that it is not completely implausible…

Rebalancing and Small Europe

April 5, 2012 5 comments

Martin Wolf has a very interesting piece on China’s attempt to rebalance its growth model from exports to domestic demand. Wolf remarkably shows how this attempt has been going on for at least a decade, with unequal pace, and several stop-and-go. I’d add that the crisis itself played a contradictory role. China on one side was one of the first countries in 2009 to implement a robust stimulus plan amounting to more than 10% of GDP; on the other, it did not resist  (as most countries) more or less hidden protectionist measures and currency manipulation. Wolf concludes that, while successful, the rebalancing from external to domestic demand led to excessive (and not necessarily productive) investment. The new rebalancing challenge of China lies in increasing income and consumption of its population.

What I take from this is that China fully grasps its new role in the world economy. Its leadership understood long ago that  the transition from  developing/emerging economy to fully developed economy needed to pass among other things through less dependence on exports. A large dynamic economy  cannot rely on growth in the rest of the world for its prosperity. Even the debate on reforming the welfare state and on health care had as one of his reasons the necessity to reduce precautionary savings. The rebalancing act is long and unsteady, but definitively under way.

It is also worth noticing that a better balance between domestic and external demand in the large economies is crucial element in reducing the macroeconomic fragility of the world economy through decreasing trade imbalances.

It is striking, in contrast, how Europe remains trapped in a sort of small country syndrome. The “Berlin View” permeating the Fiscal Compact  advocates fiscal discipline and domestic demand  compression, in order to improve competitiveness and to foster export-led growth. Besides the fact that it is not working, this is equivalent to tying Europe’s fate to the performance of the rest of the world, giving up the ambition of being a major player in the world economic arena. What a difference with the ambition and the forward looking attitude of China…