Paul Krugman, 2008 Nobel Prize winner and highly acclaimed economist, says the United States should slap a 25-percent surcharge (not a tariff, although the difference escapes me) on all Chinese products, until Beijing revalues its RMB currency.
Stephen Roach, current Asia chairman of Morgan Stanley, who’s worked for the Federal Reserve and Brookings Institute, has degrees from University of Wisconsin in Madison (for which he gets10 credibility bonus points), N.Y. University and lectures at Yale, disagrees. In an interview on Bloomberg on March 19, Roach said, ,”I think we should take out the baseball bat on Paul Krugman – I mean I think that the advice is completely wrong.”
Roach said a surcharge would be “lashing out at China rather than tending to our own business,” which should be boosting U.S. savings rates.
Roach would have more credibility if he was not also telling anyone who will listen that China does not have a real estate bubble.
How often do you see a captain of commerce characterized as a communist-sympathizing panda lover by a self-proclaimed left wing ideologue?
In this clash of titans, there seems to be no place for the opinions of mere mortals. How can anyone presume to argue with a Nobel Prize winner or the leader of one of the world’s largest banking operations? After all, economists and investment bankers are never wrong.
Perhaps the sarcasm here is a bit thick, but sensational statements and rabid retorts, although entertaining, are not enlightening. It is generally pointless to cover these tea pot tempests, but I was asked to comment on Krugman’s “compelling case” for stiff tariffs on Chinese goods by a loyal reader, so here it goes.
The great thing about economists is that they are often wrong but rarely in doubt. If you’re interested, take a look back at the apocalyptical pronouncements economists were making about the price of oil a few years ago. They also are great at developing intricate theories and models, which explain everything that happened yesterday but are useless at predicting tomorrow.
The rear-view mirror
Krugman typically wants to use the past to manage the future. In his article, he refers to a strategy used in 1971 to subdue our closest economic rivals, as the key to jack-booting the Chinese into submission. In his March 14 “Taking On China” editorial in The New York Times, it is all so simple, the complex mess we have gotten ourselves into through years of overspending and financial and actual Ponzi schemes, and it can be magically solved by devaluing the dollar against the RMB.
If it was that simple, I would be all for it, but I have this sense the world has changed since 1971, our trade relationships are a bit more complex and China is not Germany and Japan. I am also surprised Paul forgot to mention what a great help the devalued dollar was when the oil crisis was crushing us two years later in 1973. How great the good old days are when we don our rose-colored glasses or are tying to make a point.
Perhaps there are a few questions which need to be asked that can clarify my position.
Since so many of the goods bought in the United States are from China, wouldn’t adding a 25-percent tariff in essence be inflationary? The logic goes, while some goods could be replaced with lower-priced goods from other markets, there is the issue of capacity. Last I checked, it took months/years to: get permits, build necessary infrastructure, construct a factory, order and install equipment, establish logistical and supplier support networks.
While the recession has created excess capacity in various places outside of China, all of it together could not replace what China currently supplies the U.S. Thus, until either China knuckled under or the tariff had enough time to force manufacturers out of China, the person paying the cost of this experiment would be the average American family.
I also wonder how many businesses would be willing to move their factories if they knew the “surcharge” were only temporary.
There is another problem. Aren’t a lot of those horrible factories in China that churn out cheap goods, in an effort to undermine our way of life, owned by U.S. companies? When their profits dry up and the pink slips go out, adding to our unemployment numbers and downward economic spiral, I am sure a number of them and their shareholders will have some choice things to say about Paul’s great idea.
Luckily, those companies located outside China can increase their prices and profits, thanks to the 25-percent surcharge, so he will at least have some fans.
Trade war would hurt all
I wonder if it crosses Paul’s mind that although China would be severely hurt by a trade war, so might we. China might respond by erecting their own trade barriers. Our export market, which has been the only upbeat part of our economy, would take an immediate bath.
It would be a grave mistake to underestimate the extent of China’s nationalistic feelings. If you have doubts take a look at the footage from the 2008 Olympics. It was only 61 years ago that China freed itself from 100 years of humiliation at the hands of foreign powers. They still remember the opium wars which gave Western powers the right to control and sell drugs to the Chinese populace. As it has risen, there is a clear determination by the Chinese government and people to never to be subjugated by foreign powers again.
Regardless of how the trade war turned out, there would be an immediate and devastating effect on brands associated with the United States. McDonald’s, Coke and the rest would not be happy, as is clearly indicated by the words of Stephen Roach, whose business is taking care of business.
So who is right and who is wrong? Neither and both. Paul’s recipe is a poorly thought out jingoistic approach to a complex problem. The United States’ economic wounds are largely self-inflicted, and while a stronger RMB might be of some help, it will not solve the myriad of problems that we have. The part which is strange is the idea that China must change its economic behavior to benefit our economy. If the situation were reversed, would the U.S. government or its people support making sacrifices to help another nation? We have not in the past.
Paul is right that there is a problem, but acting like a back-alley thug is not going to solve it and will most likely exacerbate it.
Stephen is wrong in that he did not go far enough to acknowledge the problem or a solution. It is also hard to take a guy seriously who does not seem to understand that China has a real estate problem or that banks should be bashed for their failings
Unfortunately we come to the part where having criticized everyone, I must admit I have no easy solutions to our current predicament. My guess is the guy who works harder and doesn’t give up wins the competition, and in China, I see shop owners who work 15-hour days, seven days a week, and regular employees who work 10-hour days, six days a week. I see people and companies competing head-to-head 24/7/365.
I do not see the same level of intensity in the United States. I have two thoughts: until we can lure the Chinese into middle class consumerist lifestyles similar to our own, they will be a problem, and until we start leading by example, we will probably continue to suffer most from self inflicted wounds.
(If you are looking for something a little more comprehensive on this area I would suggest reading “FREEFALL: Free Markets and the Sinking of the Global Economy, by Joseph Stiglitz, published by Allen Lane.”)
