Global: Fortress America
Stephen Roach (from Edinburgh)
The United States is turning protectionist. Or at least that’s the growing risk in this tough economic climate. America is now taking dead aim on the “China problem.” Legislation has been introduced in the US Congress that threatens to impose 27.5% across-the board tariffs on Chinese exports into the US if the RMB peg is not abandoned. In my opinion, this is a classic example of opportunistic politics leading to bad economics. Such an approach would have negative impacts on the US, China, and the broader global economy. It is right out of the script of the nightmares of the 1930s.
At present, the odds of this piece of legislation (S. 1586) being enacted are low. I would currently assign no higher than a one in five chance to such a possibility. Yet those odds will undoubtedly rise as the US political cycle heats up -- especially if America remains stuck in a jobless recovery. Perceptions of job and income security have long been the defining issue in US presidential campaigns. It’s hard to believe that it will be any different this time around, especially since America’s hiring shortfall -- some 4.2 million jobs and counting, by my reckoning -- is the worst in modern experience (see my 8 September dispatch, Traction, Multipliers, and Leakages). Significantly, this Congressional assault on China is bipartisan -- sponsored by three Democrats (Senators Schumer, Durbin, and Bayh) and three Republicans (Senators Bunning, L. Graham, and Dole). That underscores the breadth of support for the China assault -- an especially worrisome sign of more protectionist efforts to come. For that reason, it is hard to dismiss the real significance of S. 1596: It is a shot across the bow of America’s commitment to globalization.
The economic case for such a move is as weak as they come. Most obvious, is that China’s currency is pegged to the dollar -- it hasn’t changed one iota since 1994. That means there have been no currency-induced shifts in relative prices that can explain the deterioration of US-China trade deficit from $30 billion in 1994 to $103 billion in 2002. As I have noted previously, this trend is an unmistakable outgrowth of the US penchant for outsourcing and China’s rapidly emerging role as America’s outsourcing platform of choice (see my 14 July dispatch, The Scapegoating of China). While total Chinese exports have tripled over the past decade -- rising from $121 billion in 1994 to $365 billion in mid-2003 (annualized), fully 65% of that increase can be traceable to Chinese subsidiaries of Western multinationals and joint venture partners. China’s increasingly critical role in the global supply chain is not something it achieved unfairly. It is a conscious outgrowth of a voluntary surge of foreign direct investment from the developed world. Last year alone, $53 billion of FDI flowed into China, making it the largest destination of such investments anywhere in the world. The high-cost industrial world needs China for its competitive survival. That’s what outsourcing is all about.
But America’s needs are even more special. Never before has the United States suffered such an acute shortfall of domestic saving. America’s net national saving rate -- the combined saving of individuals, businesses, and the government sector adjusted for depreciation -- fell to 0.7% of GNP in the first half of 2003. Yet it is a given that saving must always equal investment. That means, lacking in domestically-generated saving, the US has no choice other than to import surplus saving from abroad in order to fund investment and economic growth. And so America must run massive current-account and trade deficits to attract that capital. In other words, trade deficits -- and large ones at that -- are a given for a saving-short US economy. If the US wasn’t trading with China, it would be forced to run trade deficits with other nations. The fact that our largest trade deficit is with the world’s low-cost producer is exactly the way the theory of comparative advantage is supposed to work. Yet by importing low-cost, high-quality goods from China, Americans are getting a break in purchasing power. Shifting our trade deficits elsewhere -- precisely what would have to occur for a saving-short US economy -- would only erode that windfall of purchasing power. Tariffs on China would, in fact, raise the cost of doing business for many American companies. For Wal-Mart, which reportedly sources some $15 billion of product in China, S. 1586 would result in the functional equivalent of a $4 billion tax hike.
Ironically, by pointing the finger at China, the US Congress is avoiding its fair share of responsibility for America’s conundrum. In recent years, the biggest swing factor in the plunge in national saving has been the extraordinary deterioration in the fiscal position of government units -- at the federal, as well as at the state and local levels. The combined government sector saving rate has swung from a surplus of about 3% of GNP in 2000 to a deficit of nearly 4% in mid-2003. Moreover, courtesy of Washington’s latest act of fiscal profligacy, the government shortfall is set to widen by another 1 to 1.5 percentage points over the next 12 months. Unless there is a spontaneous and lasting revival in private sector saving -- highly unlikely, in my view -- the national-saving-current-account dynamic is set to worsen significantly further. That, in turn, points to still larger trade deficits -- undoubtedly with China. Should China be blamed for Washington’s reckless fiscal adventures?
In tough economic times, politicians always need a scapegoat. That’s what this wave of China bashing is really all about. It has little to do with economics and everything to do with the blame game. Yet this politically-inspired foray is symptomatic of a much deeper macro problem that now confronts an unbalanced world. The world’s sole growth engine is encumbered with the largest current account deficit in recorded history. Not only does that reflect the inherent pitfalls of a saving-short US economy but it also is a by-product of an utter lack of autonomous domestic demand growth elsewhere in the world. As America pulls the world economy along for the ride, it goes deeper and deeper into the quagmire of trade deficits, budget gaps, saving shortfalls, and excess debt accumulation. This is hardly a sustainable outcome for the US or for the rest of the world. It speaks of a worrisome and dangerous build-up of tensions in the global macro environment. Like steam in a teapot, ultimately these pressures need to be vented. Two options are available -- the economics of a US current-account adjustment or the politics of trade frictions and protectionism. The interplay between America’s jobless recovery and the presidential election cycle is shifting the odds from the economic to the political remedy. Right now those odds are low. But the risk is that they will rise.
In 1930, Senator Reed Smoot and Representative Willis C. Hawley jointly sponsored legislation that significantly raised the level of US tariffs. Courtesy of a recently popped equity bubble, the US economy was in recession, and a Republican administration favored the protectionist remedy as a means to provide relief for hard-pressed American workers. President Herbert Hoover signed the Smoot-Hawley Tariff Act into law in June 1930. Global trade retaliation quickly followed, as did a downward spiral of world trade. Many believe that was the decisive trigger for the Great Depression that was soon to follow. Such painful lessons should not be ignored in today’s post-bubble era. Yet that’s precisely the risk as politics now comes face to face with stresses and strains of globalization. Are we forever doomed to repeat the mistakes of history? |
