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Friday, May 11

Samuelson's wrong assessment of China's predatory trade practice

Readers who have been with this blog for years know that Pundita wouldn't hesitate to blame the Chinese for anything. Yet I find myself at odds with Robert J. Samuelson's analysis of why China's trade practices can be termed "predatory."
China is already the world's third-largest trading nation and seems destined to become the largest. On its present course, it threatens to wreck the entire post-World War II trading system. Constructed largely by the United States, that system has flourished because its benefits are widely shared. Since 1950, global trade has expanded by a factor of 25. By contrast, China's trade is mercantilist: It's designed to benefit China even if it harms its trading partners.

[...] For China to expand production, demand must come from its own consumers or other nations -- or some other country's production must be displaced. [...] As China moves up the technology chain, it may become the low-cost export platform for more and more industries. This could divert production from the rest of Asia, Europe, Latin America and the United States.

It is not "protectionist" (I am a long-standing free-trader) to complain about policies that are predatory; China's are just that. The logic of free trade is that comparative advantage ultimately benefits everyone. Countries specialize in what they do best. Production and living standards rise. But the logic does not allow for one country's trade systematically to depress its trading partners' production and employment. Down that path lie resentment and political backlash
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What are the policies Samuelson finds predatory?

> China's refusal to revalue the yuan, which according to a source he quotes may be 40% cheaper than it "should" be. "The resulting competitive advantage props up exports, production and jobs [in China]."

> High Chinese savings rate and their lagging behind the US in consumerism, both of which Samuelson finds irresponsible. "Personal consumption spending is a meager 38 percent of GDP; that's half the U.S. rate of 70 percent."

> China's pesky habit of using their "surplus" personal savings, supplemented by business savings and foreign capital, to fund the construction of factories. "That raises the need to export."

All this conduces to China not being a team player in the global trade arena:
Everyone complains about America's trade deficits, but they actually symbolize global leadership. Access to the U.S. market has promoted trade by enabling other countries to export. But the deficits cannot grow indefinitely. Imagine now a trading system whose largest member seems intent on accumulating permanently large surpluses.

Nor, it might be added, are surpluses ultimately in China's interests. They drain too much of its production from its citizens and contribute to growing domestic economic inequality. What everyone needs is more balanced Chinese economic growth, less dependent on exports.
And Samuelson calls himself a free trader, huh? Since when did the free trade philosophy include accusing a country of social dumping? For that's what Samuelson is complaining about. He seems afraid that Americans will have to dump their standard of living to be competitive with the Chinese.

Samuelson expresses concern for the Chinese and the reasons for their high savings rate. "The Chinese save at astonishingly high levels, partly because they're scared of emergencies. The social safety is skimpy."

Would that more Americans were scared of emergencies, eh? Fewer of us would be heavily in consumer-driven debt. And just think what our captains of industry could do with our savings surplus. Why, we might even hope to compete with the Chinese.

I am happy that Samuelson musters compassion for the plight of Chinese without social benefits such as unemployment insurance, but this has nothing to do with the issue of free trade. Neither do any of his complaints.

Samuelson doesn't strike me as being so much in support of free trade as in support of a way of life for Americans -- a way of life that he wants developing countries to support by being less competitive. He wants the Chinese to alter their behavior so that Americans don't have to alter their behavior and expectations for what the good life entails.

We don't want smelly, polluting industries in our back yards. So ship the industries to China or anywhere but the USA. We don't want to injure so much as a thumbnail while on the job, so send the dangerous jobs and loose safety regulations to China or anywhere but the USA. We don't want unions to choke American industry, so set up union-free industrial plantations in China or anywhere but the USA.

China does engage in a predatory and mercantilist trade practice: the government supports industries that dump on the least developed nations Chinese-made goods sold at below manufacturing cost. And they dump wherever they can get away with it, including the USA.

Why Samuelson does not mention this well-known practice of the Chinese government is beyond me. Yet he has misdirected attention to social dumping issues and currency manipulation. I wish I knew why. A shot in the dark is that he thinks protectionism will result, if the United States and other nations go after the real issue with China's way of doing business.
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