China As The New Japan

I am very glad to hear this from someone other than, uh, me:

China bashing during the past decade is reminiscent of the Japan bashing that occurred during the 1980s. It turned out that Japan's substantial export surplus with the US, its extensive accumulation of US Treasury bonds, and its purchases of assets in the US did not hurt the United States, but were for the most part foolish actions on the part of the Japanese government and businesses. I believe that similar conclusions will be reached about the parallel Chinese practices.

I have been saying this for years, that the Chinese trade and exchange rate policies everyone wanted to bash were doing nothing but helping us and hurting the Chinese people.  I wrote a hypothetical post from the Chinese persepective nearly 3 years ago:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

  • Limiting yuan convertibility, and keeping the yuan's value artificially low
  • Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
  • Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

I concluded in another post

Napoleon said to never interrupt an enemy when he was making a mistake.   I don't consider China an enemy, but it just flabbergasts me that the Chinese taxpayers and consumers see fit to subsidize lower prices for our consumers, and we feel the need to stop them.

More here


  1. Billy Ruff'n:

    [quote]...but it just flabbergasts me that the Chinese taxpayers and consumers see fit to subsidize lower prices for our consumers...[/quote]

    Warren, I agree completely, but what choice do they have?

  2. cas:

    I agree with Billy, it's not as if the Chinese consumers have an alternative to their government's policy. How can they make their displeasure known, without ending up in "re-education" camps? Or worse, their families will be sent a bill for the bullet used to silence their criticism...

  3. Richard Sharpe:

    I seem to recall China going on a buying spree to buy up the rest of the world using those US dollars they are holding. They are worth lots more now that the EURO has gone down.

    Never underestimate the ability of people to find clever ways out of their problems.

  4. Another guy named Dan:

    I had an insight about the Chinese economy not long ago. It seems to me that rather than thinking of it as a machine designed to export goods, it's more a machine to import cash. This seems to me to be the latest in a series of less than completely successful attempts to make them appear to be the strongest nation on earth, something of a holdover of the cultural inferiority complex the nation has had since the colonial period.

    As they realized that having a large land area under control and a large population were not sufficient to be seen as powerful, they then tried to develop an ideology they could export to be seen as a great nation. When that didn't work, they tried to develop a large military, including nuclear weapons. When that still left them seen as a distant third place, they began to attempt to accumulate huge stocks of capital, thinking that that would be what would make them be seen as a great power, peaking with the 2008 Olympic spectacle, spending huge sums of money primarily to demonstrate simply how wealthy they were.

    It will be interesting to see where they go now, since this too seems to be insufficeint fot them to be seen as a great power.

  5. Dr. T:

    You are assuming, without evidence, that China's purchases of U. S. government securities and bonds are for making money. I believe that the Chinese government wishes to hold a huge portion of U. S. debt for a more dubious purpose. Specifically, if China decides to conquer Taiwan or the Spratley Islands or Southeast Asia or Indonesia, then it might keep us from interfering by threatening an economic calamity. Dumping all its U. S. holdings would cause the dollar to plummet and would have other adverse affects on the bond market and on international investments. Combine that with the threat to expel all Americans and take over all American-owned companies in China, and our future President might be cowed into doing nothing while China starts gobbling its neighbors.

  6. David W.:

    Well, looking up some numbers - China currently has ~$1.5 Trillion in Treasuries. The total '09 budget for the US Navy and Marines is $150 Billion/year - and most of that is salaries, which presumably could be much lower for China. Surely, if China wanted to use that money for deterrence, they'd do better to buy themselves a navy? 10+ years of funding ought to be able to produce something of note!

    For that matter, if we're assuming a state of war, why couldn't we declare that bonds belonging to China will not be honored, cutting their resale value to zero, and use that profit to compensate the American owners of Chinese companies, pay for the war, and have a nice bit left over?

    No, I can believe that we might decline to go to war with China because of their army and navy, or because of their nukes, or even because we want to keep doing business with the 3rd/2nd largest economy in the world - but not because we owe them money. Traditionally, owing a lot of money to foreigners is likely to cause war, not prevent it (e.g. Hitler and the Treaty of Versailles).

  7. Kevin C:

    Wow, never quite thought of it this way. Funny thing is, I clearly remember all the wailing about Japan in the 70's and 80's. I remember their economic collapse of the 90's, but I never connected the two. Makes perfect sense and illustrates why I could NEVER be an economist.

    Where it gets REALLY interesting is this: If China makes the same mistakes, what does it DO when the seemingly inevitable collapse comes? War? Against whom and for what? Or does the current global morass defuse the potential Chinese situation, allowing the building economic problem to subside a little (or a lot)? And how much of it depends upon what The Obamination does?

  8. Streaker:

    The first link is bad.

  9. JagerIV:

    the link to the article doesn't work