Economist: Trade Barriers Won't Solve Chinese/U.S. Economic Woes

September 12, 2007

COLUMBUS, Ohio -- Economic imbalances of two of the world's major players -- the United States and China -- could shake things up in the global market, but Congress' protectionist stance against China to right the economic problems of both countries is not the solution, says an Ohio State University international trade economist.

 

Ian Sheldon, Andersons Professor with the Department of Agricultural, Environmental, and Development Economics in the College of Food, Agricultural, and Environmental Sciences, said that Congress has been discussing imposing import tariffs on Chinese goods aimed at reducing the U.S. bilateral trade deficit with China, which currently accounts for 30 percent of the overall $800 billion U.S. trade deficit.

"There has been quite a bit of noise in Congress the last couple of years about China's economic position in the world. It is on the cusp of becoming the third largest economy in the world and the second largest trading country in the world. China's gross domestic product has been growing an average of 10 percent every year since 1978, which is very large for a developing country," said Sheldon. "In recent years, many politicians believe that China has been partly able to achieve this because it is violating International Monetary Fund policies by deliberately undervaluing its currency. But trade barriers to solve this issue are not a good idea."

Sheldon shares the views of economists across the nation in the argument that imposing import tariffs will only hurt the U.S. economy and could even send the country into a recession. He will discuss Chinese economic policies at Farm Science Review during the Question the Authorities program on Sept. 18. He will give presentations at 11:45 a.m. and at 12:30 p.m.

"Protection through Congress against China is a foolish way of solving a complex problem. It is counterproductive and all that protectionism would achieve is to generate inflation in the United States, which would likely mean a rise in interest rates, with the potential for recession," said Sheldon. "The adjustment to China's economy cannot be made through U.S. protectionism, but rather through broader U.S. and Chinese macroeconomic policies."

Such policies include the appreciation of China's currency and the rebalancing of its economic growth from one based on exports and investment to one based on consumer consumption.

"For several years, China has been managing its currency, and as a result has had little flexibility to use interest rates to control inflation. While there is considerable concern within China that liberalizing the exchange rate and allowing the yuan to appreciate could hurt the Chinese economy," said Sheldon, "the Chinese government, however, does recognize the need for exchange rate reform. It is in China's best interest to let their currency appreciate and move to more flexible monetary policies. That will help in reducing the extent of global market imbalances and also ensure China's continued economic growth."

Another economic issue facing China is the instability due to high levels of investment and savings, as well as large inflows of foreign capital. Between them, these have the potential to cause deflation and the bursting of asset bubbles in equity and real estate markets. Nearly half of the country's gross domestic product is accounted for by investment. It has come mostly at the expense of household consumption, which makes up less than 40 percent of the gross domestic product.

"China is saving a huge amount, but is not importing many goods. China needs to move from a pattern of growth based on investment to one based on consumption," said Sheldon. "A consumer-led economy will, of course, put pressure on Chinese inflation -- that will have to be handled through use of interest rates. This will be possible if China eliminates manipulation of its exchange rate."

China is not the only major world player that could benefit from an economic makeover. Sheldon said the United States should take a look at its own situation.

"The U.S. is a borrower and China is a lender. There's something wrong when a developing country is lending to a developed country. It should be the other way around," said Sheldon. "We have a negative savings rate in this country. We should be saving more and spending less. This in turn would help reduce the U.S. trade deficit."

Sheldon said that to get the U.S. back on track requires three changes: a global decline of the U.S. dollar, which is already happening; an increase in the U.S. savings rate, which Sheldon believes may occur with the current slide in the housing market and the credit crunch; and an increase in U.S. net exports relative to domestic demand.

"The U.S. and China, and the rest of the world for that matter, would benefit from the rebalancing of both countries' economies," said Sheldon.

Farm Science Review will be held Sept. 18-20 at the Molly Caren Agricultural Center in London, Ohio. The event is sponsored by Ohio State University Extension, the Ohio Agricultural Research and Development Center, and the College of Food, Agricultural, and Environmental Sciences. Tickets are $8 at the gate or $5 in advance when purchased from county offices of OSU Extension or participating agribusinesses. Children 5 and younger are admitted free. Hours are 8 a.m. to 5 p.m. Sept 18-19 and 8 a.m. to 4 p.m. Sept. 20. For more information, log on to http://fsr.osu.edu.

 

Author(s): 
Candace Pollock
Source(s): 
Ian Sheldon