Monday, April 11, 2005

Stephen Roach has a phenomenal ability to both get it and not get it at exactly the same time. The latest example of that is his missive from last Friday on "The drumbeat of protectionism". Roach is right that the beating of this drum in the face of gargantuan and ever-growing US trade deficits with China combined with the most sluggish US labor market in two generations was inevitable. However, his arguments for why it is morally wrong (even though politically inevitable) are standard liberal clap-trap and simply don�t hold water.

Roach offers us two reasons why �The macro I practice suggests that the scapegoating of China is a huge mistake.� The first is an all too familiar liberal misidentification (going back to Adam Smith at least) of a �national interest� which unites the interests of all classes and class fractions.

Contrary to widespread impressions, China�s export surge is not an outgrowth of aggressive market-share penetration by rapidly growing indigenous Chinese companies. To the contrary, the bulk of the export surge has been dominated by Chinese subsidiaries of global multinational corporations and cross-border joint-venture operations. . . . Who is the New China? These numbers suggest that China�s so-called export prowess is traceable more to �us� in the West than it is to them.
As far as workers in the US textile and furniture industries goes, since when is outsourcing done by "us"? Global production may be under the direction of � and profits reaped by � US-incorporated TNCs, but that hardly means there is a US right hand "us" failing to see what its left hand is up to in China. Clearly these TNCs are not behind the "protectionist" push in the Senate � but then nobody ever said they were.

Roach�s second reason is your basic "free trade is good" schtick with a twist:
The fact that China accounts for the biggest portion of the US trade deficit is actually a good thing -- it offers America access to high-quality, low-cost goods. If a nation has to run a trade deficit -- and unfortunately that�s the inescapable verdict for a saving-short US economy -- then it makes eminent sense to trade most aggressively with the world�s low-cost producer. That�s precisely what�s happening.
Now fair enough, it takes two to tango, and American consumers are benefiting at the expense of American workers in import-substituting industries as well as those in industries which compete for labor in such industries. That being said, running a massive trade deficit with the world�s low-cost producer of consumer goods actually enables the deficit to run much larger than it otherwise would be. American worker/consumer short-term interests are running roughshod over their long-term interests, and it is hopefully the task of the state to see the larger picture and to do something with it in sight. Consider Argentina�s middle class who were eating and drinking in the late 1990s thanks to the peso peg and yet facing destruction in 2001-02 because of the very same peg.

Roach is right about one thing, however. Tense US-China relations could provoke the hard landing of the dollar which everyone fears. At the same time, tension over the trade deficit might simply become the straw that breaks the proverbial camel�s back. The chances of the US getting out of this quagmire without a recession are, as far as I can see, close to zero. Thus liberal free-traders will blame their favourite whipping boy while the truth is much more complicated.

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