May 12, 2008
As the protectionist winds begin to flow eastwards cross the Atlantic, the number one target of the protagonists is the huge Chinese deficit with the United States and Europe.
Three questions need addressing: What is the reason for the deficit? What damage does it cause? How can the deficit be reduced?
Most of us find economics baffling as economists tend to have several different views on any given subject, and the trade deficit is no exception. This plays into the hand of populist and protectionist politicians who simplistically argue that a large trade deficit is bad and China is taking jobs from Europe. It is a very complex, multidimensional and multifaceted problem which arises out of globalisation. Very few products are made these days from beginning to end in one country.
There is, therefore, no consensual answer to any of these questions and any debate is likely to generate more heat than light. At the root of it is whether or not globalisation is a good thing, upon which discussion is pointless as it cannot be stopped. The extent to which and how it can be managed is another debating question.
Finally, benefits to Europe are overall benefits. There are winners and losers and there is no satisfactory method of compensating the losers.
Some of the factors which need to be taken into account are:
What is the reason for the deficit?
A trade deficit means, of course, that imports exceed exports. It is natural for a developed high-cost economy to run a deficit with a low-cost efficient economy; it’s the size of the deficit, and the fact that it is rising, that causes concern. However, it must be borne in mind that:
• in areas where Europe is generally uncompetitive (eg clothing and shoes), restrictions on Chinese imports would simply be replaced by imports from other Asian countries (Bangladesh, Vietnam…);
• some 60% of all exports from China are companies wholly or substantially owned by foreign companies.
• the added value accruing to China is usually very limited (probably to the order of 20%).
• a high profit accrues to European and US companies.
• lower consumer prices bring both direct and indirect benefits
• China’s purchase of US debt benefits the US economy.
The US continues to apply pressure to Beijing to revalue the renminbi against the dollar. In fact, it has appreciated 16% since July 2005. However, during this same period, the renminbi has weakened some 10% against the euro, which is damaging to European competitivity. However, the problem is the weak dollar and not the strong renminbi. So long as the Chinese currency continues to track the dollar, nothing can be done about this.
What damage does it cause?
Clearly, the workers who lose their jobs due to loss of competitiveness will not be comforted by being told that their country overall benefits from importing low price merchandise.
It is hard to point to economic damage caused by the large trade deficit. The ‘damage’ is essentially political.
How can the deficit be reduced?
This is obvious. As Peter Mandelson says, the European objective is not to reduce Chinese imports but to increase European exports to China.
This means China giving European companies unfettered market access by removing all discrimination. This remains a bone of contention as Beijing insists that this market access exists, whereas European companies operating in China insist that it does not.
However, it is also time that our leaders spoke out and explained why the deficit itself is not a problem. If they think it is a problem, they should say why.Author : Stanley Crossick