Lumbering Towards A Greater Depression
April 8, 2010 - 3:59am ET
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There's a term for what the trade policies now practiced by the Chinese government, practices that Dave Johnson correctly noted are hurting the whole world's economy for what will ultimately prove to be a temporary advantage for China if the economies of their trading partners should more fully collapse: "beggar thy neighbor."
I'm going to turn here to the Wikipedia history of the Bretton Woods agreement for this reasonably concise summary of the last time beggar thy neighbor trade nearly brought the world to its knees in the 1930s, during the Great Depression:
... The planners at Bretton Woods hoped to avoid a repeat of the debacle of the 1930s, when intransigent American insistence as a creditor nation on the repayment of Allied war debts, combined with an inclination to isolationism, led to a breakdown of the international financial system and a worldwide economic depression. The "beggar thy neighbor" policies of 1930s governments—using currency devaluations to increase the competitiveness of a country's export products to reduce balance of payments deficits—worsened national deflationary spirals, which resulted in plummeting national incomes, shrinking demand, mass unemployment, and an overall decline in world trade. Trade in the 1930s became largely restricted to currency blocs (groups of nations that use an equivalent currency, such as the "Sterling Area" of the British Empire). These blocs retarded the international flow of capital and foreign investment opportunities. Although this strategy tended to increase government revenues in the short run, it dramatically worsened the situation in the medium and longer run. ...
Sound familiar? The details are different, but we've all been watching the follow-on effects of worsened national deflationary spirals.
The solution decided on at Bretton Woods ultimately was discarded and did not entirely bring an end to economic policies that have the effect of ruining entire business sectors in other nations. For example, developed nations have long used outsized agricultural subsidies not simply to preserve domestic farm economies, but to enable them to wipe out the profits of even illiterate peasant farmers in developing nations whom one presumes weren't making much to begin with.
However, it took many decades for the lessons of the Great Depression to be so completely forgotten that beggar-thy-neighbor policies were adopted by any major economy as a matter of cross-sector, national economic policy.
The currency devaluation and trade cheating the Chinese government is engaging in now isn't by any means new, they didn't invent it, it isn't some unique flaw of their national character. It's a set of practices that were widely popular in the US and Europe the last time the global trade system came crashing down.
And China might have been able to go on with it for a little while longer without so much backlash, but it should be noted here that when it comes to collapsing economies, the western nations' financial sectors had been practicing an enthusiastic do-it-yourselfism that would be laudable had all that effort been applied to some good end. The US and our usual crop of industrialized allies should do our parts in saving the world economy by immediately breaking up the banks that are too big to fail and begin addressing the root causes of rising economic inequality. If we hadn't let things get so bad on our end, we'd be in a better position to deal with all of this.
In other words, the Chinese resurgence of mercantilist trade came at a particularly bad time, when their major trading partners were particularly susceptible to any financial blow. Like a weakened patient recovering in the intensive care unit of a hospital, even a cold could have done us in; Chinese mercantilism has been a raging case of pneumonia.
Gilbert B. Kaplan, a former Deputy Assistant and Acting Assistant Secretary of the U. S. Department of Commerce, explains what the perfect storm of lax US trade enforcement and foreign trade cheating has done to American manufacturing:
... Imagine two dry cleaners on a side street in Binghamton, New York (one of the many mid-size cities in the U. S. that has been largely destroyed by international trade). Imagine that one of the dry cleaners gets a million dollars a year from the city, is not required to pay any taxes, has a guaranteed, mandatory market share from a big part of all the potential customers, and is allowed to dump its noxious dry cleaning chemicals in the river out back at no cost. The second dry cleaner gets no million dollar subsidy, pays a high tax rate, has to compete for customers, and has to carefully dispose of any environmental contaminants at a high cost. Oh, and imagine that because it's fair to its workers the second dry cleaner pays them $10 an hour instead of 87 cents an hour (the average wage in China.)
How long do you think dry cleaner number two is going to stay in business? That's what we're facing, not because dry cleaner number two is less competitive. But because the laws and rules of international competition cut against the U. S. They have been determined by multinational companies that don't care about our country's long term health, by free trade economists that only see one side of the picture, and by foreign governments well represented in international trade forums, and not by the U. S. in the articulation and implementation of a robust and fair and results-oriented trade policy. ...
Manufacturing in the US has been expanding in recent months as recession-depleted inventories are renewed. Though after the devastation of the last couple years, that news parallels the way that employment is seeing an uptick now, though the jobs added are still too few to decrease employment. In other words, none of the gains right now are good enough to start making up for previous losses, leaving our economy extremely vulnerable to trade cheating.
We've seen what happened to the world economy when the US' economy went to the brink. It's important for the millions of Americans who need jobs, and the billions of people around the world who need to be lifted out of poverty, that the US rights itself. Chinese government currency policy, it really isn't helping. From one nation that's practiced irresponsible, beggar-thy-neighbor trading to another, we should hope that China will soon say "enough", celebrate their wins and start looking for ways to increase their own prosperity without undermining that of others.
For all our divisions, all countries are now dependent on each other, and will all go forward or fall together in the long run. The resources needed to support a large, modern nation can no longer come from any single country, and many of them are running out. We've been taking progress for granted for so long that it's easy to forget that it doesn't just happen, that the amenities and global markets we enjoy were the result of deliberate decisions between nations to cooperate and then to continue doing so. These cooperative systems, like other group relationship networks, can usually withstand some defections, but there are breaking points. I'd rather not see what happens if we were to reach them.
I'd really rather not see what happens after a live action, global re-enactment of the Great Depression. That really doesn't sound fun at all.
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