Tuesday, March 16, 2010

Back to the 80s

Only it's a different country and a different dispute, but very similar to the type of rhetoric that we heard back then. This time, it is China and the US, instead of Japan and the US:

....we’ve been reasoning with China [insert 1980s Japan] for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao [insert, oh say Nakasone or later PM Miyazawa], the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued [insert "Japan's PM declared---absurdly---that the country does not have a closed market and does not discriminate against US/foreign goods. It's because foreigners don't understand Japan and don't try hard enough. Besides, Japan cannot let some foreign products in because its consumers won't buy them and their intestines are not long enough or whatever.]... ....And Mr. Wen accused other nations of doing what China [insert Japan] actually does, seeking to weaken their currenciesjust for the purposes of increasing their own exports.” Italicized portion from Paul Krugman NYT

Despite all the hot air of the time, and several attempts to right a trade imbalance with a country that did not adhere to the free market religion that the US rather absurdly seemed/seems to take as gospel, in the end it never succeeded. Nobody can deny that Japanese markets are more open than they were back then, but "free" they ain't. Japan and Japanese companies come first. Then again, name a market that is free using a definition of free that means free.

The US is now (finally) making a little more noise about China's currency manipulation and hypocrisy, but in the end, I kind of suspect it will be a lot of nudging from the US with some gradual, grudging changes by China. To me, the most interesting part about Krugman's column is his explanation on why the US need not fear China suddenly unloading all its dollar reserves:

...It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China...Paul Krugman, NYT

It's not the usual economic version of M.A.D.---Whoever shoots first, dies second---in which both countries are damaged, but seems to indicate that it would do little real harm to the US. Krugman has hinted at this in the past, but it's the first time I have seen his rational.

1600: An opposing view---(well, it is economics so no two economists agree on anything anyway)---Krugman's Reminbi Fantasy. Thanks to soma for the link.


  1. I read this yesterday and thought the logic was not completely unconvincing, but something bothered me. I guess if it was that easy.....

    Then this popped into my box this morning, probably less than half a day later. (I think they must have had it stored away for an expected rainy day).


  2. Thanks for that link. As I read elsewhere yesterday, there is no mention of how the markets would react to such a move. Probably not very well in the short-term at least.