01.13.11
Made In China: Always on the losing end
From Krugman discussing whether China and the US will soon eliminate trade imbalance. The author named says yes. I just laughed.
Krugman explains a ‘fallacy’ in the thinking, if I’m reading him correctly.
Anyway, imagine for simplicity that America and China are the only two countries in the world. And imagine that as consumer habits change, American spending falls by $400 billion while Chinese spending rises by $400 billion. Trade imbalance gone, right?
No, it’s not that easy. If US residents cut spending by $400 billion, most of that reduction — say 75 percent — will come in reduced spending on US-produced goods and services (even that Chinese pair of pajamas you buy at WalMart has a lot of US value-added in distribution and retailing.) So that’s $300 billion in reduced demand for US output. Meanwhile, a much smaller fraction — say 15 percent — of that extra Chinese spending will fall on US goods. So we’re talking about, say, a $240 billion net fall in spending on US goods and services; correspondingly, we’re talking about a $240 billion rise in demand for Chinese goods and services.
If that’s the end of the story, then the spending shift produces a depressed economy in America and major inflationary pressures in China.
What’s needed to make it come out right is something to make both American and Chinese consumers switch some of their spending toward American goods — something like a rise in the dollar value of the yuan, which makes Chinese goods relatively more expensive. So the redistribution of world spending and exchange rate adjustment are complements, not substitutes.
The idea of that coming about — the Chinese buying more US goods, other than lousy wine and boutique holiday candy — is amusing.
What would they buy that we still produce in material goods? Comic books? NFL footballs? Ford F-150s? Distressed Fender Custom Shop Stratocasters? $180 harmonicas?
Maybe F-16s or made-for-export General Atomics Predators?