Chinese Currency Deflation In Perspective
November 14, 2009 - 12:09am ET
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China's artificial currency peg has come to be a problem for many world economies, including neighboring countries in Asia, many of whom now trade more with China than with the US. It has become a threat to the global economy, mainly because of this number: 17.3 percent.
That was China's share of the world's manufacturing output as I calculated it from 2008 United Nations figures. So, close to a fifth of everything made in the world is made in China. (Which also happens to be very close to the US percentage of 17.7 percent, so it's quite clear why they have so much impact.) They're one of the few industrial nations with a positive balance of trade, and it's no surprise, the world is a seller's market for them.
When it comes to trade with the US, we've further disadvantaged ourselves by putting all our tax burden on exports, rather than imports, a practice unique among the wealthy and industrialized nations of the world. And our environmental and workplace protection standards aren't to blame; Germany has far stricter regulations than the US does on both counts and they, also, have a positive balance of trade.
The issue now is that there's very little leverage to convince China to play by others' rules. The US has the most equivalent leverage; while the Chinese government is a significant US creditor, they also can't really afford to either lose our consumer market or have our economy collapse to the point of default. Yet the US has both decreased its economic power and political clout by allowing its own middle class to be whittled down, and letting its finance sector treat interactions with the world economy like a night at the high roller table in a Caesar's Palace casino.
The US and China are stuck in this together. If one goes down, so does the other. To a larger extent, the world economy also needs both countries to have healthy economic systems. Interdependence through trade would make wrenching change inevitable throughout the globe should a major exporting nation become insolvent.
Getting China, and the US, to deal with the way their trade and business practices contribute to instability, will be the deciding factor in whether or not coming decades are prosperous for much of anyone.
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