China has only had a few years of massive trade surpluses with the US and Europe. It is, if you like, a situation akin to Japan in the mid-1970s when that country’s rising surpluses began to grate on Washington.
We all know what happened after that.
The US and Japan had two decades of difficult trade negotiations, during which there was little appreciable change in the trade balance. The issue really only went away when the Japanese economy was mired in a substantial slump and no longer seemed so threatening.
In the midst of that extended kafuffle, we also had the infamous "Plaza Accord" under which Japan agreed to a massive appreciation of its currency. The accord was about many things other than the surplus, but one of its aims was to make US companies more competitive.
Despite the rise in the yen, the trade surplus stayed stubbornly high, in Japan’s favour, and it still remains there today.
What does the Japan experience tell us to expect with China? Certainly, it tells us straight off the bat that a big rise in the renminbi is not an instant panacea for the trade balance. In fact, even a double-digit increase will have no impact, because China’s loss on exports to the US will simply be another Asian county’s gain.
On top of that, there are some obvious differences between the Japan and China models that need to be spelt out to put the relative trade disputes in context. The most important of these is the openness of the Chinese economy.
Unlike Japan, and South Korea for that matter, which chose a xenophobic model of economic growth – in other words, keep the foreigners and their capital out – China has been remarkably open.
As a result, the Fortune 500 companies in the US have, by and large, been doing terrific business in China. You name them – GM, Du Pont, P&G, Wal-Mart – virtually without exception they are thrilled about China and, in some cases, making significant bucks here.
Many of these companies were noisily on Washington’s back for years to give Tokyo a good bash. The same companies are often quietly advocating that Washington cut China a little slack.
That helps China as far as it goes, and it could be a long way. China is so integrated into the world economy, and its supply chains that stretch across continents, that they have allies all over the globe.
But sooner or later, the old adage – all politics is local – will come into play.
One major reason why things are quiet at the moment is because of the relatively strong economic growth in both the US and the EU.
The moment that stops – and there are many people predicting a US recession next year – the hunt will be on for scapegoats, both real and imagined.
China will be top of the target list in America and Europe, whether it is anti-dumping cases or trade sanctions on the agenda. There will always be some out-and-out protectionists looking for an easy way out of their problems.
But some of the complaints against China – ranging from the cheap cost of capital and a bias towards exporting in the economy – have a point.
The Chinese acknowledge this. The government’s official policy is to reduce investment and increase consumption, which, over time, should bring the surpluses back down. That is provided, of course, the US does the opposite, by cutting consumption and saving more.
The Chinese line is viewed with a little cynicism by some of Fat Dragon’s friends from Tokyo.
A Japanese government official remarked on his admiration for the clever Chinese in a recent chat, saying they had learnt very quickly to say exactly what the Americans wanted to hear – that they are going to increase consumption and lower their savings rate.
"It took us 10 years to learn how to say that," he laughed ruefully. "But the Chinese have learnt to say that after fighting with the Americans for just a few years. Very smart."
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