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Blaming China Will Not SolveAmericas Problem

Americas fixation on the China problemis now boiling over. From Google to the

renminbi, China is being blamed for all that

ails the United States. Unfortunately, this

reflects a potentially lethal combination ofpolitical scapegoatting and bad economics that

could well end in tears.

The political pressures are grounded in the angst of

American workers. After over a decade of relatively stagnant

real compensation and, more recently, a historically sharp

upsurge in unemployment, US labor is being squeezed

as never before. Understandably, voters want answers.

It is all because of the trade deficit, they are tolda visible

manifestation of a major loss of production and employment

to foreign competition. With China and its so-called

manipulated currency having accounted for fully 39% of

the US merchandise trade deficit in 2008-09, Washington

maintains that American workers can only benefit if it gets

tough with Beijing.

However appealing this argument may seem on the surface,

it is premised on bad economics. In 2008-09, the United

States had trade deficits with over 90 countries. That means

it has a multilateraltrade deficit. Yet aided and abetted by

some of Americas most renowned economists, Washington

now advocates a bilateralfixeither a sharp revaluation ofthe renminbi or broad-based tariffs on Chinese imports.

A bilateral remedy for a multilateral problem is like

rearranging the deck chairs on the Titanic. Unless the

problems that have given rise to the multilateral trade deficit

are addressed, bilateral intervention would simply shift the

Chinese portion of Americas international imbalance to

someone else. That someone would most likely be a higher

cost producerin effect, squeezing the purchasing power

of hard-pressed US consumers. Ironically, Washingtons

penchant for the bilateral fix to a multilateral problem risks

turning the tables on American workers at just the time when

they are struggling to get back on their feet in this feeble post-

crisis recovery.

As opposed to counter-productive China bashing, the United

States would be far better served if it took a deep look in the

mirror and faced up to why it is confronted with a massive

multilateral trade deficit. Americas core economic problem is

savingnot China.

Washingtons insistence on a large revaluation

of the renminbi, or the imposition of tariffs on

Chinese imports, reflects a lethal combination of

political scapegoatting and bad economics.

In 2009, the broadest measure of domestic US saving

the net national saving ratefell to a record low of a

negative -2.5% of national income. This is the sum total

of depreciation-adjusted saving by households, businesses,

and the government sector. Depreciation is removed to get

a sense of how much saving is leftafter providing for the

normal obsolescence of antiquated or worn-out capacity

for the expansion of capital stock. In the case of the

United States, there isnt any. That means America must

import surplus saving from abroad to fund the sustenance ofits future growth.

This is where China enters the equation. In order to attract

the foreign capital that America needs to sustain its growth,

the US must then run a large current account deficit. In the

case of the US, the cross-border multilateral trade deficit in

goods and services has accounted for an average of 95% of the

total current account deficit over the past five years. In other

Note: An edited version of this essay appeared as an Editorial Comment in the Financial Times on March 30, 2010.

March 30, 2010

Stephen S. Roach

Chairman, Morgan Stanley Asia

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words, for a saving-short US economy, there is literally no

escaping large multilateral trade imbalances.

Yes, China is the biggest piece of Americas multilateral trade

deficit. But that is because high-cost US companies are

increasingly turning to China as a low-cost offshore efficiency

solution. And it also reflects the preferences of US consumers

for low cost and increasingly high quality goods made in

China. In other words, saving-short America is actually quitefortunate to have China as a major trading partner.

Due to a record shortfall of domestic saving,

America must import surplus saving from

abroadand run massive current account and

multilateral trade deficits to attract the capital.

No, China is hardly perfect. Like the United States, it, too,

has a large imbalance with the rest of the worldnamely, anoutsize current account surplus. And just as responsible global

citizenship requires America to address the saving deficiency

that lies at the heart its international imbalances, the world

has every reason to expect the same from China in reducing

its surplus saving. Those adjustments must be the essence of

any successful global rebalancing agenda.

But these adjustments must also be framed in the multi-

lateral context in which the imbalances exist. Just as China is

one of over 90 countries that America runs trade deficits with,

US-China trade now represents only 12% of total Chinese

trade with the rest of the world. It is wrong to fixate on therelative price between these two nationsspecifically, the

foreign exchange rate between the US dollar and the Chinese

renminbias the solution for the deeply rooted saving

disparities that drive these multilateral imbalances.

A bilateral solution for a multilateral problem is

like rearranging the deck chairs on the Titanic.

Yet some of Americas most prominent economists are saying

the oppositeclaiming that a revaluation of the renminbivis--vis the dollar would not only create over one million

jobs in the US but that it would inject new vigor into an

otherwise anemic global recovery. Economists should know

better. Changes in relative prices are the ultimate zero-sum

gamethey re-slice the pie rather than expand or shrink it.

When nations have imbalances with a large cross-section of

their trading partnersas is the case with both China and the

United Statesthere can be no bilateral solution.

Currency, or relative price, adjustments between two

countries are not a panacea for structural imbalances in the

global economy. What is needed, instead, is a shift in the mix

of global saving. Specifically, America needs deficit reduction

and an increase in personal saving, while China needs to

stimulate internal private consumption.

Washingtons scapegoatting of China could take the world

to the brink of a very slippery slope. It wouldnt be the firsttime that political denial was premised on bad economics.

But the consequences of such a blundertrade frictions and

protectionismcould make the Crisis of 2008-09 look like

childs play.

Stephen S. Roach is Chairman of Morgan Stanley Asia and

author ofThe Next Asia(Wiley 2009).

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