China's economists and China's soft power
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Official articles by government ministers are not normally the place one looks for incisive argument – they tend to be full of stereotyped phraseology approved by a committee. But the article by China's Commerce Minister, Chen Deming, in China Daily continues to be the single best survey of the entire issue of the RMB exchange rate. No US economist supporting a large revaluation of the RMB has succeeded in replying to his fundamental points, namely that:
• Given the present international division of labor, manufacturing industries would not return to the U.S. even if imports from China were restricted; the U.S. would import from other developing countries.
• The facts show that RMB appreciation doesn't reduce the trade imbalance. From 2005 to 2008, the RMB appreciated by 21.1 percent against the US dollar but China's trade surplus went up and not down.
• The US's own export restrictions are responsible for a major part of its deficit with China. China's hi-tech imports have increased rapidly, but the US share dropped from 18.3 percent in 2001 to 7.5 percent in 2009.
Other clear explanations of the issue have come from Yang Yao, editor of China Economic Quarterly, and Yao Jian.
In contrast, even eminent of Western economists have been forced into advancing arguments on this issue they would never allow to pass in other circumstances. Paul Krugman, Nobel prize winner who has been advancing the case for tariffs against China in the New York Times, not only could not get his data right on China's trade figures (a serious shortcoming for someone proposing a trade war) but presented an argument for general trade protectionism by the US as an argument for selective tariffs against China – missing the point that selective tariffs would mean Chinese imports would be replaced by Mexican, Vietnamese, Indian and others. In short, no jobs would be created in the U.S.
Martin Wolf, the Financial Times chief economics commentator, tried to present China as the chief cause of the trade deficits of high income countries, of which the largest are those of the U.S. and UK. But OECD data shows that China accounts for only one quarter of the deficit of those countries. Wolf also put forward the unusual argument that in currency disputes: "The U.S. must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create." It is hard to believe that as serious an economist as Wolf would suggest in any other context that the U.S. could embark on unlimited printing of dollars without the gravest consequences in terms of asset bubbles, subsequent financial crashes, and inflation. Fortunately the US monetary authorities are unlikely to try such an experiment.
Naturally not all Western economists have been caught up in these incoherent arguments. Another Nobel prize winner, Joseph Stiglitz, has vigorously made the elementary, but vital, point that an increase in the RMB exchange rate would actually lead to an increase in China's trade surplus if demand for China's exports and imports is inelastic – a point of view for which there is a great deal of evidence.
But fundamentally it has been China's economists who have been making the intellectual running. It has been an exhibition of "soft power" in practice. Hopefully those dealing with other fields will learn to project China's achievements and discuss its problems with the same coherence and focus that China's economists have shown on this major issue.
The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/node_7080931.htm
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