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Quibbling with Krugman on the Chinese

I agree with pretty much everything Paul Krugman writes in his column today about the Chinese and their currency shenanigans--especially the point that the Chinese have rigged it so that our bilateral trade deficit will spike once the recovery gets going. (And the point that the forces driving our trade deficit were only temporarily suppressed by the recession.)

The only thing I'd quibble with is the implication of these two paragraphs:

So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.

Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.

I think the situation in China is slightly more complicated. For two reasons, both of which have to do with domestic politics there. On the trade deficit, I think the Chinese leadership understands the general need to "rebalance," so that the Chinese people consume more (and therefore import more), which would make their economy less dependent on exports. The problem is that investing in export-led growth, as they have for years, is a self-perpetuating cycle. It creates powerful domestic constituencies that go nuts every time you try transitioning to a different model. For example, one of the reforms China has flirted with is lowering the valued-added-tax rebate it uses to subsidize exporters. But the backlash has been intense. “You’re getting today in China industry lobbyists … coming in and screaming,” Steve Orlins, a former State Department official and investment banker who now heads the National Committee on U.S.-China relations, told me a few months ago. 

Second, on lecturing us about our budget deficit, I think the Chinese leadership also understands that withdrawing stimulus too abruptly would be a disaster, because it would send us right back into recession and make us less likely to pay them back. But, here again, they face huge political constraints at home. As I wrote in my September piece about our economic relationship with China:

The average Chinese--whether educated or not--looks at his country's swollen coffers and wonders why that $2 trillion in foreign exchange reserves isn't helping to make life easier in China--which, after all, remains a country of enormous privation. More importantly, he's entitled to voice his opinion. Although the Chinese regime is famously quick to stifle political dissent, it tends to allow criticism of the country's economic policies, seeing it as a useful safety valve.

It's a privilege the Chinese lustily embrace, carping away in the media, on blogs, and on Internet chat boards. ... Perhaps more to the point, the Chinese leadership is highly sensitive to such pressure. "Americans make mistakes when they think that politics don't exist in China, that these guys don't have to pay attention to what the Chinese people are saying," says one Treasury official. "Their room to maneuver is constrained by public opinion." Outside the obvious ways, bureaucratic politics in China isn't so different from its American counterpart. [Northwestern University professor Victor] Shih explains that rivals of senior government officials--like prime minister Wen Jiabao, or vice premier Wang Qishan--will often point to the unpopularity of certain economic policies to weaken their standing internally. 

Now, obviously, you can only plead "domestic politics" for so long--beyond a certain point that's a problem for the Chinese to worry about, not us. And often this stuff really is just a pretext for inaction. On top of which, the Chinese leadership generally isn't moved by these excuses when we invoke them (though they do understand the political constraints the U.S. administration faces).

The point is just that solving these problems isn't quite as easy as "getting tough" with the Chinese. It also takes some thinking about how we can help them help us, if you'll pardon the cliche.