Tuesday, December 14, 2004

Let it be said at the outset that all in all, I like liberals. They're usually fine people. But when liberal economists collectively sigh and roll their eyes at the very prospect of limits on trade -- dubbed "protectionism" as if to protect something is an inherently bad idea -- they are completely failing to admit the reality of the conundrum in which the global economy is currently caught.

Exhibit One is Brad DeLong and his maddeningly ever-changing blog template:
the U.S. has a *massive* national security interest in encouraging the industrialization of China as fast as possible. A poor China is an unstable China, and unstable countries ruled by oligarchies often turn to aggressive expansion as a way of using nationalism to slow the crumbling of their rule. A world sixty years from now in which Chinese schoolchildren are taught that the U.S. did what it could to speed Chinese economic growth is a much safer world for my great-grandchildren than a world in which Chinese schoolchildren are taught that the U.S. did all it could to keep China poor.
Exhibit Two is Pro-Growth Liberal at Angry Bear, a web site with a pleasant template and easy-to-read fonts:
Just when we thought we�d see a fall in the price of clothes courtesy of allowing more imports from China, we learn this:
Eighteen days before the end of a 30 year-old system restricting international trade in textiles and apparel, the Bush administration is imposing new barriers on imported clothing that is likely to curtail an expected flood of Chinese imports in the first few months of next year. The administration's measures include an embargo that will be imposed throughout the month of January on some of the clothing shipped to the United States during the final months of 2004.
Then again � this Administration is also making sure we can�t buy more shrimp from Asia at low prices.
I won't even bother with Dan Drezner -- political conservative but economic liberal -- who never saw a trade deficit he didn't like.

While it feels good as a righteous liberal free-trade warrior to rail against textile import quotas and shrimp tariffs, an unpleasant reality needs to be faced. Liberals are proud members of the reality-based community, no?

This is the reality: the US trade deficit so far is 21% larger than in 2003 and the overall current account deficit as a percentage of GDP could hit 6.0% by the end of the year. The top contributor to the US trade deficit continues to be China, which thus far in 2004 has $131.4bn goods trade surplus with the US. Consider that the US goods trade deficit with China is larger than its deficits with Japan and OPEC combined. The US goods deficit with the entire EU-15 is only two-thirds the size of the goods deficit with China.

Considering both [1] industrial supplies and consumer goods are the biggest categories contributing to the US trade deficit and [2] China is the biggest country contributing to the US trade deficit, it is essential that if nothing else the growth of industrial supplies and consumer goods imports from China must be stopped.

How can this happen without tariffs and/or quotas? Overall exports will have to grow 50% faster than imports just to keep the trade deficit stable, much less start to shrink it. That's a short way of saying there is no way in hell the US can address the trade deficit without reducing imports. And remember that the US services surplus -- every free-traders' golden child which will save the family from ruin -- is actually shrinking.

The Chinese have already demonstrated that they refuse to let the dollar fall vis-a-vis the renminbi, and we know that a falling currency by itself won't do much to reduce the trade deficit. With China and transnational capital working together to eliminate the US industrial base, and the Chinese increasingly cultivating Brazil as its source of agricultural imports, even a falling dollar/rising renminbi won't have much effect on the US-China trade balance.

So how does it happen then? Wave a magic wand? Perhaps the responsible liberal would like to see higher real interest rates, and indeed this must be part of the plan. But how high must they go to reduce US imports? A federal funds rate of 4%? 5%? Higher? With a US recession on the horizon, dramatically higher real interest rates in 2005 are going to be a very bitter pill to swallow. Think of 1981-82 and how fun that was.

Bush would love to cut US consumption via [1] cutting Social Security benefits and/or [2] a general consumption tax -- both of which would further shift the tax burden from capital to labor. I hope that's not what liberals are proposing instead of the continuation of quotas and tariffs . . .

In the 1980s the Reagan administration laid down the law to the Japanese who were running enormous trade surpluses with the US at the time: move more of your production facilities to the US or face punishing tariffs. At the very least the US needs to stop the hemorrhaging of its textile and furniture industries caused by imports from China. A cooperative but tough-nosed approach like the one taken in the 1980s would be preferable to a "trade war". But short of real threats against China backed up by real quota/tariff policies, all I'm hearing is a free trade policy which will run the US and the global economy right off the road in no time.

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