Wednesday, October 15, 2003
First Japan, now China
(Via Andrew) Tacking on the obligatory swipe at the IMF, Joe Stiglitz dismisses attempts by the U.S. administration to blame China for its economic woes and pins the blame right where it belongs -- the massive U.S. deficit. As several economists including Stiglitz have noted, the last time the U.S. had an out-of-control deficit, Japan was to blame. This time around, it's China.
First, international trade is based on the principle of comparative advantage: countries export goods in which they have a relative advantage and import goods in which they have a relative disadvantage. America now has a relative disadvantage in manufacturing, while China has a relative advantage. China should be exporting manufactured goods to the US.
Second, if a country invests more than it saves, it will need to borrow, and the counterpart to that borrowing is a trade deficit. America's burgeoning trade deficit is a result of Bush's unprecedented mismanagement. Tax cuts that the US could ill afford turned a huge fiscal surplus into a massive deficit; rather than saving, America is borrowing, much of it from abroad. That - not China's exchange rate policy - is the culprit.
The IMF is right: there is a real risk of global instability, but the underlying cause is massive US borrowing from abroad. If, some day, America's creditors decide that they want to hold fewer dollars, it could set off large exchange rate movements, causing global instability. Why hasn't the IMF sternly criticised these deficits?
First, international trade is based on the principle of comparative advantage: countries export goods in which they have a relative advantage and import goods in which they have a relative disadvantage. America now has a relative disadvantage in manufacturing, while China has a relative advantage. China should be exporting manufactured goods to the US.
Second, if a country invests more than it saves, it will need to borrow, and the counterpart to that borrowing is a trade deficit. America's burgeoning trade deficit is a result of Bush's unprecedented mismanagement. Tax cuts that the US could ill afford turned a huge fiscal surplus into a massive deficit; rather than saving, America is borrowing, much of it from abroad. That - not China's exchange rate policy - is the culprit.
The IMF is right: there is a real risk of global instability, but the underlying cause is massive US borrowing from abroad. If, some day, America's creditors decide that they want to hold fewer dollars, it could set off large exchange rate movements, causing global instability. Why hasn't the IMF sternly criticised these deficits?
