Friday, January 1, 2010

Blog Topic of the Day: China

Thanks to Krugman, I see that China is the blog topic of the day.

Yglesias takes issue w/ Krugman, saying that the US should adopt looser policy to get a different currency alignment. However, due to capital controls, this wouldn't happen automatically, but rather, if the Fed did *way* more QE, and the dollar declined dramatically, it would put pressure on the Chinese to seek a higher revaluation. (Partly b/c Europe and other countries would put more pressure on the Chinese...)

My two cents about the issue is that China's policy, of piling up massive reserves and undervaluing its currency, is extremely smart industrial policy. Any trade model of increasing/dynamic returns will yield the conclusion that John Stuart Mill/Hamiltonian infant industry protection is a good idea for developing countries (and this also happens to be what the data say. My only problem w/ Rodrik's paper is that he somehow missed the infant industry argument... but i digress) And anyone who was around during the Asian Financial Crisis knows that having a mountain of US Treasuries can be of help in a pinch.

Despite the above logic, however, Larry Summers is on record calling Chinese currency manipulation "stupid". Hopefully, he realizes that, in reality, it isn't stupid, and second, that this is something the US should fight.

OK, back to research...

1 comment:

  1. I think there is a lot more to consider with the infant industry argument. I don't argue that because of economies of scale, historical market control etc that emerging markets are hindered from prospering when international trade is open. However, I think there are other issues to consider here.

    In terms of protectionism, currency devaluation is probably the "safest" since it's a less direct form; but I think retaliation can play a major role in hindering your industries from growing. China is a bit different because we rely on a lot of there goods and so we can't play too many games, but for other emerging markets it could surely occur. To me, that's a dangerous game since if other nations retaliate your industry surely won't prosper in the long-term. Yes, we have historical examples where this didn't hold (the U.S. tariffs of the 1800s and up into WWII, obviously did hurt us in the long run), but I think we are in a different world now where free trade is considered the benchmark for every nation and if one doesn't buy into the orthodoxy, surely retaliation is on the table. I think sooner or later we are going to see this with China if they don't revalue their currency.

    I think another component to this is countries that still aren't nearly developed as China, but are still "developing." I fear they will see what China has done with their currency, saw that it worked, and mimic. I worry that because of the emerging orthodoxy that retaliation will be much more swift because it will be easier than imposing it against China, and that will ultimately prevent some countries from emerging from "developing" status. I would also expect the World Bank and the IMF to be less willing to assist if some developing nations pursued those policies.

    I just think the infant industry argument doesn't hold in the modern world, it's time has run out because the major powers believe free trade is how it should be and, I believe, will retaliate if too many countries adopted such policies. China is so essential to the global economy right now, I think retaliation would be put off as long as possible; but for other emerging powers I think it would be on the table and I think it would be counterproductive to their growth in the long-term, even when considering "infant industry."