Judging from the rhetoric of U.S. politicians, a trade war with China is liable to break out at any moment, unless China takes measures to reduce its gaping trade surplus with the U.S. Clearly taking his cue from an enraged and increasingly protectionist Congress, Commerce Secretary Carlos Gutierrez said on Wednesday, "China's failure to address economic frictions will have consequences. Without concrete results, the administration, and the American people, may be forced to reassess our bilateral economic relationship."
Maybe Gutierrez should have checked the financial news this week. China's trade surplus with the rest of the world actually fell in February, dropping to $2.45 billion from $9.49 billion in January, representing China's lowest trade surplus since July 2004.
Bloomberg News attributed the drop to rising incomes in China and increased demand, which, if true, would be good news for the world economy. Reuters noted, however, that the February statistics included a big chunk of the Chinese New Year celebration, a period during which factories in China close down, but consumers spend more than ever. In any case, it's a number that only represents one month, and surely won't be enough to derail current anti-China sentiment.
But it's important nonetheless, because spurring domestic demand in China is crucial for global economic health. If China simply continues on its current export-led growth, it could end up killing the golden goose -- aka the American consumer. As economist Thomas Palley writes in a forthcoming article in the Journal of Contemporary China, "The contradiction in the Chinese development model is that China's success threatens to undermine the U.S. economy, which has provided the demand fueling that success."
Whether or not China's growth is really hurting the U.S. is a question that free-traders and protectionists and everyone in between has strong opinions on. But there's no question that, as economic recoveries grow, the current U.S. version has been extraordinarily tepid for average-income families. The benefits of free trade are not being distributed equally (either in the U.S. or in China) and that could have serious long-term ramifications.
Put Palley in the camp of those who see serious clouds on the horizon. I encountered the work of Palley, a former chief economist for the U.S.-China Economic and Security Review Commission and director of the Open Society Institute's Globalization Reform Project, through a New Economist link to a collection of papers on globalization and offshoring published this week by the International Labor Organization. Palley's paper focused on the U.S.-China trade relationship, and his blog led me to a wealth of other articles that have strong relevance to the core concerns of How the World Works.
Palley believes, as do most analysts, that China needs to significantly upwardly revalue its currency to create a more level playing field for competition with the U.S. He even appears to accept the necessity of threatening punitive tariffs, à la the proposal of U.S. Sen. Graham and Schumer, to get China moving promptly on the topic. But he doesn't believe that tariffs will lead to an actual trade war, because, in his view, China has so much more to lose from a trade showdown with the U.S. that it will buckle in the face of a serious U.S. threat. This point is disputed by other analysts, who worry that China could respond to tariffs by refusing to continue to subsidize U.S. budget deficits by buying huge amounts of U.S. Treasury bonds, but, suffice to say, Palley's analysis is the most rigorous and convincing on the U.S.-China relationship I've yet seen coming from anyone on the left.
Perhaps his most interesting recommendation, and likely the one that will be the hardest to implement, has to do with how exactly China should spur demand. China, he argues, needs independent trade unions that can collectively negotiate on behalf of workers with both China's domestic firms and the multinational corporations responsible for so much of China's exports.
If it seems circular to recommend the creation of independent trade unions in a country where the the widespread exploitation of low-wage labor is one of the factors undermining the power of unions in the United States, then so be it. China is already experiencing severe social unrest as its headlong rush to market capitalism has led to increasing inequality. China needs to figure out ways to spread the fruits of its economic growth more widely, and one way to do that would be to allow workers to organize independently.
Another way would be to introduce some kind of minimum wage, which is another of Palley's recommendations, and interestingly, is also being pushed by Morgan Stanley's top China analyst, Andy Xie. Raise the minimum wage, agree the leftist economist and the Wall Street analyst, and you enable greater consumer demand in China, which will increase Chinese imports, decrease the Chinese trade surplus, and put the whole global economy on a more balanced footing.
Palley's no pie-in-the-sky dreamer, though. As he notes, there are severe political obstacles to the formation of independent trade unions in China. And any U.S. pressure on that front would run the obvious risks of being seen as both hypocritical (for the Bush administration) and a form of protectionism. China's leaders would have to see such movement as being in their own interest. Will they do it in time to ward off a global recession? That, of course, is the million-dollar question for which there is no easy answer. In the meantime, all we can do is look at the February statistics for Chinese imports, and cheer on the novice Chinese consumer. American consumers have been doing all the work for the world economy for a long time. It's time for someone else to take over.