Editorial: It Isn’t Working for Anyone Else
Editor: NY Times
China’s economic strategy over the past two decades has been remarkably successful. By opening its doors to foreign investment and manipulating currency markets to keep the renminbi from rising against the dollar, it hitched itself to consumers in the industrial world and achieved spectacular growth.
While the strategy is still working for China, it is exacerbating economic weakness around the globe. If China keeps it up, other countries are likely to use their last available weapon — protectionism — to stop the onslaught of artificially cheap Chinese goods. A trade war is easy to start and hard to contain. It could hit everybody’s exports, disrupting growth everywhere.
As China has flooded the world with exports, it has edged out suppliers from other developing countries. This was bad enough when the world economy was growing briskly.
Now China’s strategy is doing considerably more harm. In many countries, fiscal stimulus efforts have been weakened by inflows of cheap Chinese imports that have soaked up some of the money added by these government programs.
With global demand flagging, the Chinese government has manipulated its currency, the renminbi, even more aggressively. After having allowed the renminbi to appreciate gradually against the dollar for three years, in the summer of 2008 China re-established a hard peg, ensuring that the renminbi followed the dollar as the American currency fell against the euro and the yen. That has put enormous pressure on the economies of Europe and Japan.
If China continues its beggar-thy-neighbor currency policy, it will make it even harder for countries and the global economy to revive. As overextended governments wind down their fiscal stimulus, many economies will have to rely on exports as a crucial source of demand while their consumers restructure their sorry personal finances.
This task is made much more difficult if China is flooding the world with cheap goods. China’s exports rebounded sharply in December after more than a year of decline. Its trade surplus — after falling last year — is expected to rebound sharply in 2010.
There are healthier strategies for China to follow. In particular, it could deploy some of its mountainous reserves at home to pay for long-neglected social spending: on health care, education and pensions. This would provide substantial economic stimulus and improve the lives of its people.
If it sticks to its cheap-renminbi guns, however, it is bound to draw a protectionist response. The Obama administration already has caved to political demands and slapped exceptional tariffs on Chinese tires and antidumping duties on steel pipes. Congress has been uncharacteristically quiet, but patience is wearing thin in Washington and everywhere.
India has filed a stack of trade complaints against China. And the Asia-Pacific Economic Cooperation forum recently urged the adoption of “market-oriented exchange rates” for Asian currencies, a reference to China’s manipulation.
A trade war with China would be disastrous and bound to escalate around the world. Restraint is needed. But we fear no one is going to feel restrained if China doesn’t change its strategy.