Greenville Business Magazine 2010 February issue : Page 13››columns Chinese New Year of the Tiger: Krugman vs. Back BY XIAOBO HU, | PHOTOGRAPH BY OLIVER YU FOTOGRAPHIE what we did with those low interest rates was mainly to inflate a housing bubble.” Krugman further suggested “that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs,” though he may have to recalculate this. Krugman spent the remaining half of his column trying to assure us not to be afraid of confronting the Chinese and that a trade war is the way to correct the Chinese “mercantilism.” Such a “rancorous tone in the debate over America’s response to Chinese trade surpluses” prompted an instant response from The Wall Street Journal by Aaron Back, a journalist who frequently reports on China. On this first working day of 2010, Back characterized Krugman’s column as “striking” from a most respected and influential U.S. economist yet “similar to those made for years by trade unions and congressmen, usually dismissed by leading economists.” Back viewed this latest Nobel Laureate as endorsing “protectionism as a response to American under-employment, defying the very broad consensus among mainstream economists for free trade, and basically dares China to respond by dumping its holdings of U.S. Treasurys.” Back pointed out that Krugman’s argument lacked any T his year is the Year of Tiger in the Chinese zodiac. Chinese everywhere will celebrate the lunar New Year this year on February 14th with the Spring Festival, which falls on our Valentine’s Day. However, an intensi- fied discussion about China already started in the U.S. on the last day of the old year. On the New Year’s Eve, Paul Krugman, the 2009 Nobel Laureate in Economics, published his New York Times column calling for us to engage in protectionism or a trade war against China. Krugman argued that protectionism is not always a bad thing, “because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.” Other- wise, you must have “learned Econ 101 from the wrong people.” A special rule should be applied so that we can use protec- tionism again mercantilism, which are basically the same thing. Krugman termed China’s currency policy as mercantilist, and “to put it bluntly, predatory.” Despite up 20 percent in the value of yuan in the last four and half years, “Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses.” Krugman continued, “China’s accumulation of foreign reserves, many of which were invested in American bonds, was arguably doing us a favor by keeping interest rates low – although explanation or theoretical back-ups, except for quoting “the recently deceased Keynesian economist Paul Samuelson as saying that mercantilist policies are actually appropriate when employ- ment is ‘less than full.’” Back also pointed out that other leading economists would disagree with Krugman on his arguments and suggestions in regard of winning a trade war against China. On Wall Street, Vice President of the World Bank and a Chicago Econ Ph.D., Justin Lin, recently reminded everyone that a trade war against China would not balance the U.S. trade with the rest of the world, but only further harm the American consumers, as most observers had noticed that cheap Chinese products benefited both international businesses and American consumers. The Chinese manufacturers keep less than $10 for a $100 “Made in China” commodity sold in the U.S., not to mention that a good proportion of these $10 has been re-invested in the U.S. Lin had spent over a decade studying the Chinese economy before assuming the World Bank position, and he warned that one of the biggest problems in China was income disparity. The increasing disparity, according to Lin, would slow down China’s reform and affect the regional and global economic revitalization. As it elevates more people from poverty and further enlarges its middle class, China will offer a bigger market for the international businesses. A trade war in the Year of Tiger prevents international busi- nesses from exploring this bigger market in China. As the Chinese saying goes, if two tigers fight, at least one will be wounded. ■ Xiaobo Hu is the Director of the Center for China Studies at Clemson University. FEBRUARY 2010 | GREENVILLE BUSINESS MAGAZINE 13 >>columns - Chinese New Year of the Tiger: Krugman vs. BackXiaobo HuThis year is the Year of Tiger in the Chinese zodiac. Chinese everywhere will celebrate the lunar New Year this year on February 14th with the Spring Festival, which falls on our Valentine’s Day. However, an intensified discussion about China already started in the U.S. on the last day of the old year. Publication List |
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