China and the US: The growing drumbeat of protectionism

I'd highly recommend reading The Drumbeat of Protectionism, the latest epistle from Stephen Roach. In it he outlines his growing fears over US protectionism towards China:

It was inevitable.   With America beset by record trade- and current-account deficits, the drumbeat of protectionism is getting louder and louder in Washington.  Not surprisingly, the assault is taking dead aim on China - by far the biggest bilateral piece of a trade gap that hit $617 billion in 2004.  Is this just political saber-rattling, or a threat to be taken seriously?

Roach says he used to think the odds of the US imposing hefty tariffs on Chinse imports were low. But "those odds are now increasing".

In large part, that’s because of the shifting context of America’s trade dilemma - an exploding overall deficit and an increasingly visible role played by China, which accounted for 26% of the total US trade gap in 2004.  Washington has had a number of long-simmering concerns with respect to Chinese trade - especially over furniture, semiconductors, and intellectual property rights. But the recent surge of Chinese textile imports into the US could well be the proverbial straw that breaks this camel’s back ..Chinese textile exports into the US have surged some 63% from year-earlier levels in the first three months of 2005.  Little wonder that anti-China sentiment in the Senate has risen to a boil.

But trade sanctions would be to misunderstand the US trade and current account problems:

In my view, the US external deficit is, first and foremost, an outgrowth of America's unprecedented shortfall of domestic saving. ...The net national saving rate - the combined saving of consumers, businesses, and the government sector, all adjusted for depreciation - has plunged to a record low of 1.5% of GDP since early 2002. Lacking in domestic saving, American must then import surplus saving from abroad to keep its economy growing - and run massive current-account and trade deficits to attract the capital.

If that is the case, then trading with China makes sense:

If a nation has to run a trade deficit - and unfortunately that’s the inescapable verdict for a saving-short US economy - then it makes eminent sense to trade most aggressively with the world’s low-cost producer.  That’s precisely what’s happening.

And trade sanctions would just make things worse

If the US Congress were to close down trade with China today, a saving-short America would then have to run a deficit with a higher-cost producer somewhere else in the world - the functional equivalent of a tax hike on the American public. The fact that China accounts for the biggest portion of the US trade deficit is actually a good thing - it offers America access to high-quality, low-cost goods.

What how should China counter these growing tensions?

...the wisest course of action for China would be pre-emptive action aimed at defusing these tensions.  The currency is the most obvious candidate, but there are other options - namely, adjustments to export subsidies, voluntary restraints on textile exports, and an accelerated pace of trade concessions previously negotiated under WTO accession.  The choice is China’s to make.  But the message from the US Senate is that Washington politicians will not give up until China flinches, or is penalized.

UPDATE: I should have cited the 4 April New York Times story by David Barboza, Stream of Chinese Textile Imports Is Becoming a Flood (registration required). Also check out General Glut's Globblog 11 April post on Roach. Opinionated as always:

Roach is right that the beating of this drum in the face of gargantuan and ever-growing US trade deficits with China combined with the most sluggish US labor market in two generations was inevitable. However, his arguments for why it is morally wrong (even though politically inevitable) are standard liberal clap-trap and simply don’t hold water.

Comments

[touche]

China needs to float its currency now so that politicians in developed countries won’t blame their arbitrary exchange rate for our economic ills. Plus, our currency is going to tank eventually and they should cut their losses while they can.

I think the Asia countries can thrive along with countries that can provide them commodities and that they can be weaned from consumers in developed countries. The US is similar to the former Soviet Union, its military and government has outgrown its economy and are now bleeding it dry. The US needs to come to grips with this reality. Unfortunately, I don’t think we can do this any more gracefully than the Soviets.

[Mr. Econotarian]

Whenever I hear people complain about the US savings rate, I think about what people spend a lot of their money on.

A lot of Americans spend $50,000-$100,000 on a college education. This is a significant investment in themselves, and has a high tangible return above most other investments. Should education really be considered consumption instead of savings?

Put another way, if I save $5,000 and spend $45,000 on a wild night in Vegas, statistics will show I am a better saver than someone who spent $50,000 on a college education...

Meanwhile, a lot of Americans spend $100,000-$600,000 on a house. Ignoring the risk of a housing bubble, the fact is that this is generally the largest investment most Americans make, and has often brought real returns in line with many other investment types. Should a house really be considered consumption instead of savings?

Similarly, Americans generally spend $100-$500 a month on an automobile, which is an investment that makes having a job possible, thus has significant returns. The actual investment in the car is a bad deal, and many people should probably buy less car, but having a way to get to your high-paying job is important.

Of course, I'm not sure these "savings" are going to help the US in terms of currency values should, for example, there be a revolution in China and the government sells all their dollar-denominated reserves on the way out the door to buy safe places to live and avoid the firing squad.

On the other hand, I think Americans are making prudent investment decisions. They are getting good returns by not saving.

[touche]

After reading his editorial published in the Washington Post today, it looks like Paul Volcker is in the same camp as Stephen Roach. Volcker was Greenspan's predecessor.

www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html

[simon]

The current trade deficit has little to nothing to do with saving rates. Why do people make such STUPID assertions. Why would it have anything to do with teh US situation? Macro economic explanations offer no udnerstanding of the reality that drives companies. Are you saying that GM or Ford is losing to Toyota due to savings rates? IF you are you don't have a clue. Pick an industry that the US once dominated and ask yourself how in the world you can get savings rates into the equation. Macro econ is impotent on this issue. It merely rationalizes flows on the margin.

The US borrows for what reason?

The deficit has more to do with two factors- manufacturing management skill and labor costs.

American have ceased to be manufacturing-oriented. Many executive know NOTHING about how to effectively manage mfging. Just looks at GM and Ford to pick two GIANT failures. The executives who run these corporations are not worth 25 cents on a good day.

In addition labor costs make mfging very expensive. This is partly due to management-labor relations that created health and pension costs that are no longer sustainable.