Twofish's Blog

December 20, 2008

Notes on China/United States trade

Filed under: china, finance — Tags: , — twofish @ 10:47 am

bsetser: Back when the RMB was (correctly) considered a one way bet, China erected capital controls to keep American (and other) capital from speculating on its currency.

No. Capital controls were put in place during the era of central planning when the RMB was basically valued at a state fixed rate that had nothing to do with the actual market value. The official exchange rate in the 1980’s was 3 RMB to 1 dollar, which meant that there was a huge black market for dollars.

bsetser: And for most of this decade, the net outflow from China to America came not from a desire on the part of Chinese savers to hold dollars but rather from a desire of China’s government to hold the Chinese currency down against the dollar.

Because in 1993, when China moved off the old central planning system, the conventional wisdom was that emerging markets needed to peg their currency to the dollar. It wasn’t until 2002, that this started to break, and changing currency policy isn’t something you do overnight.

Also there is this underlying assumption that somehow there is a “natural” value of currency that is independent of government action, which doesn’t make any sense to me. The reason the dollar dropped in the early 2000’s was because of US government fiscal and monetary policy, and there is this odd idea that somehow US state action that resulted in a drop in currency is legitimate while Chinese state action to do otherwise is illegitimate.

bsetser: . A currency union in theory shouldn’t require that kind of government intervention to keep in balance.

That’s not true. Currency unions require massive government coordination and intervention to work. Look at how difficult it was (and is) to create the euro.

bsetser: The depreciation of the Japanese yen and Chinese yuan against most European currencies over the past several years….

This actually points out one reason why I don’t think that most of the discussion about the trade deficit with China really wasn’t about the trade deficit. What in 2003, was everyone talking about China and no one talking about Japan, which had broadly very similar policies.

Two reasons:

1) During the early 2000’s China was the new “evil empire.” China sort of became the symbol of a rising power standing for what America was against, and so the trade deficit was just part of this view of China.

2) There were also specific trade issues that were new and had yet to be resolved. In the 1990’s, Chinese manufacturing massively increased and there as a lot of adjustment to be done.

Both those factors are gone. I don’t think that the United States views China as an “evil empire” any more largely because the neo-conservative view of the world that saw China in those terms has been so thoroughly discredited by the Iraq War. The US has human right issues with China, but the US also has human right issues with Saudi Arabia, Pakistan and Singapore.

The other factor is that deals have been made. No one complains about Japanese auto imports because deals were made, and the in the main industries with Chinese imports, similar deals have also been made.


One other thing is that you have to look closely at language because the terms that people use have some deep and subtle assumptions about the way the world works.  For example the notion of “government intervention” has the assumption that the action of the government is “unusual”, “unnatural”, and “abnormal.”  I’ve never heard people talk about “market intervention in the government.”  Take a piece of text that talks about “intervention” and replace it with “regulation” and vice versa.

The interesting thing about a lot of this language is that it is designed around assumptions about how the world should work and how the world does work that have totally fallen apart.  There is this idea that there is this market that somehow acts “naturally” to distribute goods and services and that any state action to change how the market operates is bad unless proven otherwise.

Having assumptions is not a bad thing.  Thought because impossible otherwise.  But one does have to be very careful in times like this when no one has any clue what is going on that one shouldn’t be trapped by the assumptions.


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