Celebrated Priceton Economist Krugman Says China is the Bad Guy in Currency War

http://seekingalpha.com/article/230061-krugman-china-is-really-the-bad-guy-in-currency-war

Krugman: China Is ‘Really the Bad Guy’ in Currency War

October 14, 2010

The U.S. Senate will pass legislation geared to pressuring China to revalue its currency and the US is set to label China a currency manipulator. The view in Washington ahead of the mid-terms is that China is "the bad guy" as Paul Krugman explains in the video below.

Here is a synopsis of the Krugman position:

•The Chinese have no intention of revaluing. Most moves they have made to date are cosmetic and done in a calculated fashion ahead of international meetings to deflect criticism.
•"Emerging markets could be a help to the world economy." The shortage of investment opportunities in the advanced economies and the abundance in the emerging markets means it is mutually beneficial to have capital flow to the emerging markets and "drive this recovery."
•We don’t know the RMB’s fair value. "The right way to judge is not the value of the renminbi" but rather the scale of currency intervention China must effect to keep its peg in place.
•"The Chinese are playing with fire here." If they act soon, we can have a reasonable workout. If they wait, protectionism is coming.
•Tim Geithner has held the protectionists at bay but he will not always be the negotiating partner for China.
•China should take the brunt of criticism despite the impact that talk of the Fed’s quantitative easing is having on the US currency.
My problem with tough rhetoric is that it tends to escalate a situation and lead to brinkmanship. Michael Pettis has a different message. Echoing a post from last week, in an op-ed in the FT he says "Do not overreact to China’s currency delays." He believes changes will occur without brinkmanship.

The angry statements about currency manipulation continue, with anger focused on China’s renminbi. It is not the only country to intervene, but the scale of its action and the size of its trade surplus make it an obvious target. An excessive focus on the renminbi will soon make a bad situation worse, however, especially for China. As Premier Wen Jiabao’s testy statement last week in Europe revealed, for all its growth, China’s economy remains unbalanced and vulnerable to deterioration in its trade account…

Any solution will therefore require statesman-like behaviour, in which the major economies agree to resolve their trade imbalances over several years. But periods of global economic contraction and rising unemployment do not usually welcome statesmen. Sadly, it is much more likely that trade relations will continue to deteriorate, and the longer surplus countries drag their heels the more attitudes will harden. In that case, China’s overinvestment problem is certain to become even worse.

Meanwhile, the rhetoric by some in China has become a tad more shrill. Reuters reports:

"The dollar’s depreciation may appear to be market-driven. In reality, it is a depreciation colored by very strong, deliberate actions," Li said in the paper, which serves as the chief mouthpiece of China’s ruling Communist Party.

The overseas edition of the People’s Daily is a smaller offshoot of the domestic edition.

Li said the Federal Reserve’s announcement that it might soon launch another round of quantitative easing by buying bonds and other financial assets had been the key factor pulling down the dollar.

The motives were plain enough, he said.

Without a weaker dollar, the United States would have no hope of meeting President Barack Obama’s goal to double exports in five years, Li said.

Dollar depreciation will also serve longer-term interests by generating inflation and easing the debt burden that the financial crisis dumped on the U.S. government.

Neither China nor the US has publicly recognized the other’s negotiating stance. Could all this all be political posturing for domestic constituencies on both sides? We’ll find out in due course.

Krugman is on the far left. A pro-interventionist. Some good insights generally here.

Krugman is a clown. If he is any good, US financial wouldn't be in such a mess now.

Devil Within said:

Krugman is a clown. If he is any good, US financial wouldn't be in such a mess now.

Click to expand...

Krugman is right. China has been getting off with this
currency manipulation and unfair trade practices for
too long.

FlipSide said:

Krugman is right. China has been getting off with this
currency manipulation and unfair trade practices for
too long.

Click to expand...

US is always good at putting the blame on others. As if China is the cause for all the US cock up. What a load of crap. The only people who is making US miserable is the US gov themselves.

Interventionist is just a nicer name for a protectionist.

FlipSide said:

Krugman is right. China has been getting off with this
currency manipulation and unfair trade practices for
too long.

Click to expand...

Krugman is a fucking idiot, and China has been playing him and the world all along. Do you seriously think that revaluating the Renminbi will make any difference? China is fighting them tooth and nail to up it just a few percent. Even if you strengthen the RMB to 3 times what it is today, the US and the rest of the world will still run a huge trade deficit. When a China worker is paid 50cents an hour, and the US worker is paid $10 an hour, all the currency revaluation in world will not help you.

Zombie said:

Interventionist is just a nicer name for a protectionist.

Click to expand...

Simple solution.
Scrap WTO and each country impose import tariff and
restrictions on a equal retaliation basis.

Lets see the fun !

Krugman is a joke in Germany. All he has is ideological ramblings along the lines of "stimulus!" and "Keynesianism!" So he's a Nobel laureate. Well, so are Hayek and Friedman. Why should anyone listen to this clown who makes bad predictions one after another?

The interesting thing is that Japan which used to run the biggest trade surplus in the world,and always consistenly (for about 30 years)claimed that foreign exchange has absolutely nothing to do with trade,suddenly now making big noise about currency war,and it seems that currency is the only thing that matters.

www.businessweek.com/.../finance-chiefs-warn-currency-war-is-risk-to-growth.html

Communist China is of course a currency manipulator,in addition to being the biggest info manipulator in the world!three class above PAP in Chinese only,but for English,MM LKY is the grand master!

Dreamer1 said:

The interesting thing is that Japan which used to run the biggest trade surplus in the world,and always consistenly (for about 30 years)claimed that foreign exchange has absolutely nothing to do with trade,suddenly now making big noise about currency war,and it seems that currency is the only thing that matters.

www.businessweek.com/.../finance-chiefs-warn-currency-war-is-risk-to-growth.html

Communist China is of course a currency manipulator,in addition to being the biggest info manipulator in the world!three class above PAP in Chinese only,but for English,MM LKY is the grand master!

Click to expand...

China has lost heavily due to this - almost 30% of its dollar
reserves have been wiped out by the falling dollar value.

The USA will continue to flood the global market with US dollars
and cheapen it all the way down. At one point, it will create enough
bubbles and bubbles in most emerging markets including in China and that will be the tipping point.

GoFlyKiteNow said:

China has lost heavily due to this - almost 30% of its dollar
reserves have been wiped out by the falling dollar value.

The USA will continue to flood the global market with US dollars
and cheapen it all the way down. At one point, it will create enough
bubbles and bubbles in most emerging markets including in China and that will be the tipping point.

Click to expand...

Communist China has no real alternative but to allow faster RMB appreciation,and communist party intends to stay put in power,so they also have no alternative but introduce policies that can reduce the impact in employment.China would clock in investment driven growth of aroud 10% for the next few years.(bad growth)


But overall,it is very obvious that the global inbalances cannot be resolved,with or without President Obama,because it is a political problem for China and it is now out of bound for the rest of the world,including Uncle Sam. .


There is littel disagreement that the only way to resolve the current global inbalances is for surplus countries,namly Communist China,in addition to Germany,and Japan to increase consumption and for deficient countries mainly USA to consume less.

But with the current political situation in China,with a high level of corruption and increasg rich/poor gap(GINI),onsumption running at less than 40% of the GDP(USA is currently atv 70%)how can China increae domestic consumption?

President Hu and premier Wen have an easy run,when they duly ransfer power in 2012, hier successors are going to hv a very difficult job,frankly I do not see anyway out of this mess.



Can the new chiefs convince 10% of the population who has 85-90% % of the wealth to buy more Feeraris or pivate Boeing 747s?

Professor Ralph Gomory fr NYU has an interesting proposal to resolve this problem

The United States can deal with its trade deficit. It can balance trade. There are two ways to do this, and there may be more. Tariffs are one. The second is less well known but has major advantages: balanced trade with balanced certificates. Both approaches meet two important criteria: that the actions the U.S. chooses should be under U.S. control and do not require the cooperation of a mercantilist partner; and that the actions should be effective — they should actually balance trade.
Tariffs have a long and checkered history reaching back through centuries. In the United States, no discussion of tariffs is complete without mentioning the Smoot-Hawley tariff of 1930. There are many who credit this tariff with making the Great Depression even greater. Then there was President Nixon’s 1971 across-the-board tariff imposed to compel Japan and other nations to appreciate their currencies. It is generally credited with doing so.

Tariffs meet the first criterion: They can be enacted, repealed or modified by the United States without the consent of its trading partners. Whether they are compatible with WTO Article XII, which permits extraordinary actions in the face of severe and continuing trade imbalances, is something that can be argued.

Tariffs have the advantage of being flexible. They can be applied to different countries or to different classes of goods. They can be set high or low. If they don’t initially seem to be producing the desired result, they can be set higher. As a result, they can meet the second criterion: They can get the job done. They can balance trade.

However, the effect of tariffs on the scale of trade is a major drawback. Tariffs tend to diminish trade, and therefore its benefits. There is also the unpleasant possibility that tariffs could trigger a trade war in which countries react to their trading partner’s tariffs with tariffs of their own. This is the effect that followed the U.S.’s imposition of the Smoot-Hawley tariff.

In an extreme case, one can imagine trade being balanced by tariffs, but balanced at some level far below the pre-tariff-war level. It is this potential for tariffs to limit or even eliminate trade that make tariffs so extremely unpopular among economists. And economists matter. They often directly formulate government economic policy. Economists do not want a world economy in which tariffs and counter-tariffs cut off the benefits of trade. They strongly believe and have taught it with pride to generations of students.

Tariffs are the “obvious” means to balance trade. But while economists stand against them — and label those who promote them as protectionists — it is equally true that economists have no other ideas on what to do to counter mercantilism. There is, however, a well-known economic concept worth considering to counter mercantilism.

In a remarkable article that appeared in Fortune magazine in 2003, Warren Buffett described the use of what he called import certificates that could be used to balance trade. University of Chicago Professor Robert Aliber has discussed a similar concept he calls “points.” These proposals have much in common with a well-known economic concept called cap and trade used to set limits on pollution.

With cap and trade, permits to pollute are either issued or auctioned to companies that emit pollutants. Companies must obtain enough permits to cover their emissions. If they can reduce their emissions they can sell their permits to others. Pollution cannot exceed the total of all the permit amounts issued. That is the cap.

When this same concept is applied to international trade it is called balancing trade with balanced certificates (BT/BC), an acronym that can also be used for “balancing trade with Buffet certificates.”

Here is an example. A company that exports $1-million worth of goods or services produced in the U.S. earns a certificate for that amount. These certificates are then traded on an open market. Any company that wants to import into the United States is then required to have certificates with total face value equal to the value of the proposed import.

This produces balanced trade very directly as the total value of imports is limited to the total value of certificates available, which is the total value of exports. The export total is the cap in limiting imports.

Many variations are possible. Like tariffs, the certificate system could be applied to specific nations or to specific classes of merchandise or in special situations or to all of these. The price of the certificates sold could go to the producers or in part to the government. The program could be introduced gradually by initially giving more than a dollar of imports for each dollar of exports, but decreasing that amount over time.

Unlike ordinary tariffs, the direct effect of BT/BC is not to lower or eliminate trade but to lower or eliminate the imbalance of trade. This is important. Imagine that the United States decides to balance trade with the set of countries with which it has persistently large trade imbalances. Such a group could be called China+. Here are some observations:

- When BT/BC is fully applied trade is balanced.

- The market price of the BT/BC certificates is an incentive to U.S. producers to export. This translates into jobs in this country.

- The market price of the BT/BC certificates makes the China+ group’s goods more expensive in the U.S.

- There is an incentive for the China+ nations to import U.S. goods, because that in turn will increase their own ability to export to the U.S.

- Should the China+ group respond with certificates of their own (a certificate war) they are simply moving the world toward balanced trade. Should they decide to respond with tariffs, they will be acting to reduce their own exports as well as those of the United States.

With a BT/BC plan, the China+ nations can avoid massive expenditures on certificates either by decreasing exports to the United States or increasing imports from the United States. The option of decreasing exports would allow the United States to re-grow its industries, while the option of increased imports from the U.S. would provide export-based jobs in the United States with no decrease in imports. In this case, the increase in U.S. exports would tend to drive down the price of certificates so that the real world might well come close to the world of textbook trade where trade is naturally balanced.

BT/BC is very much in line with the spirit of both the IMF and the WTO. The IMF states in Article I of its charter that one of its purposes is the balanced growth of international trade, while the WTO states in its preamble the aim of securing reciprocal and mutually advantageous trade.

Mercantilism is not going to go away. The United States must find a way to deal with its consequences despite the fact that powerful sectors of American society benefit from the present situation and therefore oppose change. If the United States is willing to face up to the reality of mercantilism it will find ways to arrest its downward slide.

The country must act before it is too late.

– Ralph Gomory is a Research Professor at NYU, President Emeritus of the Alfred P. Sloan Foundation and former IBM Senior Vice President of Science & Technology. This is the second of a two-part series, the first of which ran in the last issue of Manufacturing & Technology News

Increasing import tariff would fuel inflation as long as there's demand, especially inelastic demand of necessities. That can be socially and politically tricky and sticky.

Marketing genius Steve Jobs respresents the powerful sector of the American society that benefit from the present situation.

By subcontracting his entire production to FOXCONN, ,a China-based unit of Taiwan's Hon Hai Precision Industry.which employs about 2 million workers across China,
breakdowns estimated Apple makes at least US$200 per iPad sold

Report: Apple Cuts 0.7 Percent of iPad Profit to Give Factory Workers Big Raise

http://www.dailytech.com/Report+App...ve+Factory+Workers+Big+Raise/article18571.htm

China is artificially controlling its currency while US is letting free market reign.

They are both playing on an uneven field.

Lets even it out either both float or both put in controls.

See who will win. China or US.

My bet is China will collapse if they go on a currency war.

Of course China is a currency manipulator - and it has been benefitting from it. Who sets the Currency Exchange rate? The Chinese Central Bank? No - its the Politboro. This is now a internal Chinese Government situation which will not bow to Western Pressure. For China's own good and the global economy, China must let the Yuan rise it will benefit in the long run and rebalance global trade.

Another case point of Chinese Authoritarism not working in our global economy. Get rid of Communism and problem solved.

Chinese reserves hit 2.64 Trillion thanks mostly to the Euro hitting 1.4.

Ramseth said:

Increasing import tariff would fuel inflation as long as there's demand, especially inelastic demand of necessities. That can be socially and politically tricky and sticky.

Click to expand...

Tariffs are usually impose on goods where there are domestic producers. If there is a tariff on foreign imports, then the so-called rational consumers would substitue towards the domestic equivalents, thus protecting that ailing domestic industry and keeping jobs for those workers in that industry.

Not so much of an inflation problem really. Tariffs are mostly government bestowing unfair protection to domestic producers at the expense of domestic consumers and that's exactly what the US doggies are good at doing.

Fuck uncle SAM! The Chinese should retaliate by demanding the US dogs to stop being such a sore loser protectionist!

Loofydralb said:

China is artificially controlling its currency while US is letting free market reign.

They are both playing on an uneven field.

Lets even it out either both float or both put in controls.

See who will win. China or US.

My bet is China will collapse if they go on a currency war.

Click to expand...

China is a sovereign nation. Its currency regime is entirely its sovereign decision be it free float, dirty float or whatever.

The US is always welcome to change its dollar regime to suit the ever changing trend in international trade. Not the other way round!

What makes u so sure that China will collaspe in the currency war?