Junuury 1, o1o

Chinese Mercuntilism
By Puul Krugmun
L`s Lhe seuson when pundILs LrudILIonuIIy muke predIcLIons ubouL Lhe yeur
uheud. MIne concerns InLernuLIonuI economIcs: predIcL LhuL zo1o wIII be Lhe
yeur oI ChInu. And noL In u good wuy.
AcLuuIIy, Lhe bIggesL probIems wILh ChInu InvoIve cIImuLe chunge. BuL Loduy
wunL Lo Iocus on currency poIIcy.
ChInu hus become u mujor IInuncIuI und Lrude power. BuL IL doesn`L ucL IIke
oLher bIg economIes. nsLeud, IL IoIIows u mercunLIIIsL poIIcy, keepIng ILs Lrude
surpIus urLIIIcIuIIy hIgh. And In Loduy`s depressed worId, LhuL poIIcy Is, Lo puL IL
bIunLIy, preduLory.
Here`s how IL works: UnIIke Lhe doIIur, Lhe euro or Lhe yen, whose vuIues
IIucLuuLe IreeIy, ChInu`s currency Is pegged by oIIIcIuI poIIcy uL ubouL 6.8 yuun
Lo Lhe doIIur. AL LhIs exchunge ruLe, ChInese munuIucLurIng hus u Iurge cosL
udvunLuge over ILs rIvuIs, IeudIng Lo huge Lrude surpIuses.
Under normuI cIrcumsLunces, Lhe InIIow oI doIIurs Irom Lhose surpIuses wouId
push up Lhe vuIue oI ChInu`s currency, unIess IL wus oIIseL by prIvuLe InvesLors
heudIng Lhe oLher wuy. And prIvuLe InvesLors ure LryIng Lo geL InLo ChInu, noL
ouL oI IL. BuL ChInu`s governmenL resLrIcLs cupILuI InIIows, even us IL buys up
doIIurs und purks Lhem ubroud, uddIng Lo u $z LrIIIIon-pIus hourd oI IoreIgn
exchunge reserves.
ThIs poIIcy Is good Ior ChInu`s exporL-orIenLed sLuLe-IndusLrIuI compIex, noL so
good Ior ChInese consumers. BuL whuL ubouL Lhe resL oI us?
n Lhe pusL, ChInu`s uccumuIuLIon oI IoreIgn reserves, muny oI whIch were
InvesLed In AmerIcun bonds, wus urguubIy doIng us u Iuvor by keepIng InLeresL
ruLes Iow - uILhough whuL we dId wILh Lhose Iow InLeresL ruLes wus muInIy Lo
InIIuLe u housIng bubbIe. BuL rIghL now Lhe worId Is uwush In cheup money,
IookIng Ior somepIuce Lo go. ShorL-Lerm InLeresL ruLes ure cIose Lo zero; Iong-
Lerm InLeresL ruLes ure hIgher, buL onIy becuuse InvesLors expecL Lhe zero-ruLe
poIIcy Lo end some duy. ChInu`s bond purchuses muke IILLIe or no dIIIerence.
MeunwhIIe, LhuL Lrude surpIus druIns much-needed demund uwuy Irom u
depressed worId economy. My buck-oI-Lhe-enveIope cuIcuIuLIons suggesL LhuL
Ior Lhe nexL coupIe oI yeurs ChInese mercunLIIIsm muy end up reducIng U.S.
empIoymenL by uround 1.q mIIIIon jobs.
The ChInese reIuse Lo ucknowIedge Lhe probIem. RecenLIy Wen JIubuo, Lhe
prIme mInIsLer, dIsmIssed IoreIgn compIuInLs: On one hund, you ure uskIng
Ior Lhe yuun Lo upprecIuLe, und on Lhe oLher hund, you ure LukIng uII kInds oI
proLecLIonIsL meusures. ndeed: oLher counLrIes ure LukIng (modesL)
proLecLIonIsL meusures precIseIy becuuse ChInu reIuses Lo IeL ILs currency rIse.
And more such meusures ure enLIreIy upproprIuLe.
Or ure Lhey? usuuIIy heur Lwo reusons Ior noL conIronLIng ChInu over ILs
poIIcIes. NeILher hoIds wuLer.
FIrsL, Lhere`s Lhe cIuIm LhuL we cun`L conIronL Lhe ChInese becuuse Lhey wouId
wreuk huvoc wILh Lhe U.S. economy by dumpIng LheIr hourd oI doIIurs. ThIs Is
uII wrong, und noL jusL becuuse In so doIng Lhe ChInese wouId InIIIcL Iurge
Iosses on LhemseIves. The Iurger poInL Is LhuL Lhe sume Iorces LhuL muke
ChInese mercunLIIIsm so dumugIng rIghL now uIso meun LhuL ChInu hus IILLIe
or no IInuncIuI Ieveruge.
AguIn, rIghL now Lhe worId Is uwush In cheup money. So II ChInu were Lo sLurL
seIIIng doIIurs, Lhere`s no reuson Lo LhInk IL wouId sIgnIIIcunLIy ruIse U.S.
InLeresL ruLes. L wouId probubIy weuken Lhe doIIur uguInsL oLher currencIes -
buL LhuL wouId be good, noL bud, Ior U.S. compeLILIveness und empIoymenL. So
II Lhe ChInese do dump doIIurs, we shouId send Lhem u Lhunk-you noLe.
Second, Lhere`s Lhe cIuIm LhuL proLecLIonIsm Is uIwuys u bud LhIng, In uny
cIrcumsLunces. I LhuL`s whuL you beIIeve, however, you Ieurned Econ 1o1 Irom
Lhe wrong peopIe - becuuse when unempIoymenL Is hIgh und Lhe governmenL
cun`L resLore IuII empIoymenL, Lhe usuuI ruIes don`L uppIy.
LeL me quoLe Irom u cIussIc puper by Lhe IuLe PuuI SumueIson, who more or
Iess creuLed modern economIcs: WILh empIoymenL Iess Lhun IuII ... uII Lhe
debunked mercunLIIIsLIc urgumenLs - LhuL Is, cIuIms LhuL nuLIons who
subsIdIze LheIr exporLs eIIecLIveIy sLeuI jobs Irom oLher counLrIes - Lurn ouL
Lo be vuIId. He Lhen wenL on Lo urgue LhuL persIsLenLIy mIsuIIgned exchunge
ruLes creuLe genuIne probIems Ior Iree-Lrude upoIogeLIcs. The besL unswer Lo
Lhese probIems Is geLLIng exchunge ruLes buck Lo where Lhey oughL Lo be. BuL
LhuL`s exucLIy whuL ChInu Is reIusIng Lo IeL huppen.
The boLLom IIne Is LhuL ChInese mercunLIIIsm Is u growIng probIem, und Lhe
vIcLIms oI LhuL mercunLIIIsm huve IILLIe Lo Iose Irom u Lrude conIronLuLIon. So
`d urge ChInu`s governmenL Lo reconsIder ILs sLubbornness. OLherwIse, Lhe
very mIId proLecLIonIsm IL`s currenLIy compIuInIng ubouL wIII be Lhe sLurL oI
someLhIng much bIgger.