Twofish's Blog

January 3, 2010

Disagree with Krugman, Fallows, and Pettis

Filed under: china — twofish @ 4:44 pm

http://jamesfallows.theatlantic.com/archives/2010/01/krugman_protectionism_and_the.php

Disagree pretty strongly with Krugman, Fallows, and Pettis about the RMB revaluation.  I think that they are vastly overestimating the amount of political pressure that exists in the US for protectionism, and making incorrect comparisons with the 1930′s.  There are a number of differences….

1) First of all, outside of some very specific industries, it’s not obvious to anyone that tariffs are going to help employment.  The problem is two-fold.  First is that you have many industries (Walmart and software) that benefit from cheap Chinese goods, and there are some major interest groups that have switched from being pro-tariff to anti-tariff over the last thirty years (organized labor).  The second issue is that a lot of the groups that would be protectionist really don’t care about China.  If you move Chinese factories to Indonesia, it won’t help anyone in the US.

2) Second, is that we have an international framework for trade now, and this limits what people can do.  In order to do something really drastic, the US would have to decide to pull out of WTO, which would be politically difficult because of factor 1).  There are too many people benefiting from international trade for the plug to be pulled.

3) Finally, I think that people vastly overestimate the importance of legislation and economic policy in globalization.  There hasn’t been any major trade liberalization legislation passed since the late 1990′s, and the many things that create globalization are technological.  I can be sitting in an office in NYC, and type on a computer in Hong Kong, and I do this pretty routinely.  Instant messaging, cheap phone calls, and jet travel have reduced the costs of international trade enormously and since the 1990′s, *those* have been the driving factors for trade liberalization, not legislation.

Having said that, personally I think that as a mechanism for resolving trade dispute, protectionist tariffs as a tools are *MUCH* better than currency revaluations.  The trouble with currency revaluations is that they always have massive global unpredictable effects.  Targeted industry specific tariffs within the framework of WTO are much, much less unpredictable.  Even when they cause bad things to happen, they tend to be known bad things, whereas tinkering with currency policy tends to cause generally unknown bad things to happen.  Having the US stick tariffs on Chinese steel might be annoying, but it’s not going to kill either the Chinese or US economy, whereas there is a laundry list of countries that have had their economies wrecked by bad currency policy.

So if it’s necessary to protect a class of politically sensitive constituents with tariffs, then I think it’s a good idea for the US or China to raise tariffs at that specific industry.  All of this can be discussed and negotiated within a WTO framework.  US puts tariffs on steel, China raises a counter tariff on something else, WTO blesses everything and we just carry on business. It’s especially good, because one you have tariffs to protect steel workers or textile workers, they aren’t going to care about tariffs in other areas.  You’ll only have problems if people want to try to raise tariffs on everything, but that would require pulling out of WTO, and you’ll blow up the industries that *do* generate jobs from trade.

This poses a general problem with macroeconomic solutions which is why I like industry-specific tariffs.  Macroeconomic solutions tend to be extremely blunt and can’t really be used to micromanage an economy.  If you have steel workers that are screaming at you, the only think that an economist can tell you to do is to do something like raise interest rates, which then changes the whole world in unpredictable ways.  If you just do targeted industry tariffs and then negotiate with your trading partners over what tariffs *they* can raise, then you end up with “known bad stuff” happening.

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4 Comments »

  1. Fallows is an idiot. In one inteview, he paints all of china racist because he didn’t feel obama received a warm enough welcome. Krugman is a fool. The guy is high on his nobel.

    Comment by asdf — January 4, 2010 @ 4:17 pm

  2. Twofish,

    What do you think about Krugman’s other columns, regarding the stimulus and the need to continue quantitative easing.

    Comment by Oyomei — January 5, 2010 @ 4:09 am

  3. China follows a mercantilistic model, full stop. Otherwise large and persistent external surplusses would be undersirable. If we assume that they are not, and that the government has the power and tools to change the currency regime if it wanted to, as they do, then this has to be the case. I cite mercantilism to denote a model, not whether it is good or bad. Hong Kong is the same way, so is Singapore for the most part, though both are economically tiny. China needs trade disputes with the US, and to focus on the USD/RMB rate to take attention away from looming trade problems with its neigbors. The US output and employment shares from manufacturing has not really changed in recent years, though the industrial composition has shifted. This shifts the politics, and creates problems. The bigger problems, however, will come from inter-regional trade frictions in Asia, where there are more substantive problems related to the currency policy and regime. The real story is not the RMB USD rate, it is the RMB/Baht/Ringit/Peso/Won rates. Trade frictions between the US and China are just a useful distraction for all sides. It is worrying, however, when there are a bunch of sectors, like steel, where China has excess capacity on a global scale, and simply because there is a very narrowly targetted measure, that the US suddenly becomes comprehensively protectionist. I would not be surprised at all if China were dumping pipes and other low-end steel products. Mercantile nations dodn’t like restrictions on trade regardless of whether actual practices go against agreed upon international rules. I have seen nothing refuting the US actions in this case (and there are other cases where the US actions were later shown to be baseless) that have been backed by anything other than angry propaganda. Seek truth from facts. China has offered no facts to back its displeasure, and rarely does. The US side needs more facts in recent cases as well, and should make the rationale (including the math) for trade measures transparent and public.

    Comment by Moumou — January 5, 2010 @ 9:13 am

  4. I think whenever you start labeling a economic system a “whatever-ist” model that you run into problems since by labeling it it’s easy to stop thinking about what’s going on. “Merchantialism” has a lot of connotations, and if you use it to just denote a country that has external trade surplus, it becomes confusing.

    Also I think that looking for “facts” in trade disputes as a bit of a red herring. The basic “fact” is that putting a trade barrier will get someone elected or not elected, and anything else is something of a smoke screen.

    Comment by twofish — January 13, 2010 @ 1:40 am


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