Twofish's Blog

November 22, 2008

Notes on Chinese trade policy

Filed under: china, finance — Tags: , — twofish @ 7:17 am

http://mpettis.com/2008/11/rising-unemployment-increases-the-pressure-for-misguided-trade-policies/

  1. China can go fiscal while doing tax rebates. Personally, I don’t think that the tax rebates are going to do more than band-aid the situation since taxes on nothing are nothing.

    Pettis: Calling on the US government to engage in massive fiscal expansion to replace lost private demand is crazy. It means that we should continue the current game that has led us into so much trouble, but instead of having US over-consumption and rising debt at the private level we must have it at the public level.

    First the US government is the only entity that can generate the demand that is necessary and with all of the money that is going into treasuries it has a lot of free money that it should be doing.

    Second, the problem with what the US did from 2002-2008 was not that it expanded the economy. That was good, and it got us out of the 2002. The problem with what the US did was that this investment was in non-productive goods and that the benefit to the consumer was in the form of low interest loans rather than in higher wages. The US should try to generate demand by reducing consumption and having a massive effort to increase investment in roads, factories, health, education and anything else that will generate long term returns.

    Pettis: China needs to resolve this problem by expanding fiscally, not by stimulating exports.

    China doesn’t have a big enough economy to resolve global problems. It’s going to have a tough enough time fixing internal problems.

    Quote: The world has excess production and there is a need for the US to reduce its demand and increase its savings.

    *THIS* is the crazy part. We have overproduction and the solution is to reduce demand….. Hello???? If we have overproduction then we want to increase demand by any means possible.

  2. Pettis: It is amazing to me that people like Ferguson, who have been arguing correctly for years that US consumed too much and saved too little, are now terrified of the necessary adjustment, and are arguing that it should be stopped and even reversed.

    From my point of view the implication here is that they were wrong in the first place.

    Pettis: The process cannot be stopped – US savings are too low and will rise one way or the other.

    If you have savings rates that are too low in an era of overcapacity, you can have the government print money and stuff it into people’s bank accounts. Boom. Instant savings. Take debt and print money to erase it. Boom. Instant equity. That’s actually more or less what the government has been doing.

    None of this makes sense in normal times, but if you have people without jobs, and factories that can produce stuff that aren’t producing it, and the only problem is lack of money, you can print it.

  3. One other thing is that I don’t think that trade policy is really going to make that much difference. You can issue as many tax rebates as you want, but if no one in the United States is buying then it’s not going to make much of a difference. Also, I don’t think that trade is going to be a major source of friction because what either China or the United States can do is constrained by WTO rules, and WTO provides a forum for everyone to coordinate policy.

    What is going to be more interesting is the complex interactions between trade, monetary and fiscal policy. For example, if China takes huge fiscal stimulus but the US does not, then you are going to see the RMB weaken, and this could produce a worse balance of trade with the United States unless China agrees to peg its currency to avoid devaluation. So if either China or the United States or Europe takes fiscal stimulus, this is going to require some coordination of trade and monetary policy with the other actors.

    The other thing is that very unexpected things have happened and will continue to happen and figuring out ways of reacting to them is going to make things very interesting.

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