Looking for a Villain, and Finding One in China
By EDUARDO PORTER - NYT - WEEK IN REVIEW
REMEMBER when China was exporting deflation? It was only a couple of years ago when economists warned that the country's cheap manufactured exports could push the world dangerously close to a spiral of ever-lower prices.
"The Chinese economy has certainly emerged as an important ingredient in the U.S. deflation story," warned Stephen S. Roach, chief economist of Morgan Stanley in October 2002. The World Bank also chimed in: "China's overreliance on the external sector 'exports' China's own deflation to the rest of the world."
Well, that's over. In March, inflation reared its head in the United States. The Labor Department reported that in the first quarter of the year, consumer prices rose at an annual pace of 5.1 percent. But despite this U-turn in the outlook for prices, one thing didn't change: China is still part of the problem.
Carl B. Weinberg, chief economist of High Frequency Economics, wrote to investors last week that "China's crowding into world commodity markets will boost perceived inflation in all the world's economies for a long time unless its growth trajectory is crimped." As an uncertain recovery in the job market and a bloated trade deficit stoke a lingering economic malaise in the United States, the prospect of China emerging as a competitor on an equal footing has led economists, businessmen and politicians to blame it for every economic woe.
Almost every politician, it seems, agonizes over China's vast labor force sucking in the world's industrial jobs. A few fret about China becoming too large a consumer market, enabling it to dictate terms to American businessmen and policy makers.
Some concerns are warranted. China's fast growth has been the major force behind the surge in commodity prices. Last year it ate up half the world's concrete output, a quarter of its steel production, a fifth of its copper and about 40 percent of its coal.
Moreover, China's entry into several markets, from toys to T-shirts, pretty much wiped out the other producers. "There are bound to be uneven effects in sectors they buy from and sectors that compete with them," said Jagdish Bhagwati, an economist at Columbia University.
But to hear some economists, it would seem that China has locked United States businesses in a deadly kung-fu grip. In a recent paper, John H. Makin of the American Enterprise Institute said China is choking off the profits of American companies with its hunger for commodities pushing up the price of raw materials and its cheap labor holding down the price of finished goods.
Even as China soaks up the world's manufacturing jobs, Mr. Makin wrote, Chinese workers are not spending their paychecks, salting them away instead in savings accounts and thus creating an imbalance between booming supply and weak demand.
Congress has tried to come to the rescue. In February, a bipartisan group of senators argued that China's undervalued currency has played a "major role" in the loss of 2.6 million American manufacturing jobs, and submitted a bill to slap a punitive tariff on Chinese imports.
But many economists, including Mr. Bhagwati, argue that China is getting a bum rap. "China's net effect on us is much less than what we think," Mr. Bhagwati said.
For instance, critics in the United States point to last year's $124 billion trade deficit with China as proof that the country is destabilizing the global economy by adding too much demand and too little supply. But China's global trade surplus last year reached only $16 billion- a better balance of supply and demand than the United States' $517 billion global deficit.
Besides, "much of our bilateral deficit with China is the transfer of previous deficits with Korea and Taiwan," said Clyde V. Prestowitz, a trade adviser in the Reagan administration who heads the Economic Strategy Institute. "Most of what China sends to us we stopped making back in the 1970's and 1980's."
Other economists argue that China's impact on prices is also overstated. In a recent study, economists at the Federal Reserve tried to figure out whether China was in fact exporting inflation or deflation to its trading partners. They concluded it was too small to do that. China accounts for only 5 percent of global exports and global gross domestic product, the study noted, and "the impact of Chinese exports on global prices has been, while non-negligible, fairly modest."
Fears of an Asian menace have come and gone before. The recession in the early 90's prompted dread that Japan would become the world's pre-eminent economic power, opening a Japan-bashing season that featured Americans smashing Toyotas with sledgehammers.
What seems to trouble Americans most about China is not its current economic impact, but what it might become. According to Goldman Sachs, China's economy will be bigger than America's by 2041. "It has the potential to displace the U.S.A. as the numero uno," said Mr. Prestowitz of the Economic Strategy Institute. "That's the bottom line."
Mr. Weinberg at High Frequency says that Americans will stop worrying about the current Asian menace when they feel better about their own economy. "If we were creating 200,000 jobs a month no one would care about China," he said.
The United States might then choose to see China as an upbeat influence: the supplier of cheap manufactured products that helps keep American consumer prices low; a key export market; and a major underwriter of the United States' budget deficit, which plows its savings into Treasury bills, contributing to America's economic recovery by helping keep interest rates low.
With fears of deflation dissipating, Mr. Roach at Morgan Stanley has taken to a more upbeat view of China's influence on the world: "We ought to be thanking the Chinese," he wrote last month.
But Americans probably won't.
Copyright 2004 The New York Times Company |
