Geithner’s view may be askew

October 26, 2010

Ed Yardeni thinks Tim Geithner is off point:

Tim Geithner thinks he can solve the world’s economic problems by getting countries with large trade surpluses to reduce their surpluses and by getting countries with large deficits to reduce their deficits. The problem is that fixing the world economy isn’t as simple as suggested by Mr. Geithner. Multilateral approaches rarely work because it is so hard to get universal agreement on what to do.

China’s competitive advantage has less to do with the foreign exchange value of its currency than the pitiful provision of social welfare by the nation’s government compared to the abundance of social welfare provided by the American government. This is the major source of the global economy’s imbalance. This is why the US trade deficit with China has totaled $1.8tn since December 2001, when China joined the World Trade Organization. That number contributed greatly to China’s record hoard of international reserves, which totaled $2.6tn during August. Think of that sum as the money that the Chinese did not spend on social welfare at home, but did so abroad, especially in the United States.

Problems must be recognized to be solved. There is, in fact, growing recognition of the causes of the global imbalance. The Chinese may be starting to move toward providing a better standard of living for their workers, though there is little discussion yet about providing a comprehensive social welfare safety net anytime soon. European social welfare states are moving to downsize their safety nets. In the US, the November 2 congressional elections will determine if Americans have the determination to bring back a modicum of fiscal discipline.

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Chinese Supplier Survey: Yuan Appreciation Will Hurt Exports

We talk so much about how China needs to allow its currency, the renminbi (or yuan) to appreciate. We talk some about how an appreciation of the renminbi will bring back American jobs (by making Chinese exports relatively more expensive and U.S. exports relative less so) ­– though that is debatable. But we talk very little, if at all, about the effect of a renminbi appreciation on manufacturers, on workers, and on consumers in China.

It’s a gap I have been lamenting (and the reason we’re working to ask small and medium-sized suppliers in China what their perspectives are on U.S./China trade). So I was absolutely thrilled this morning to get a press release highlighting the results of a survey of Chinese suppliers. The bottom line? “China suppliers are convinced the yuan’s appreciation will affect exports negatively, even if the currency strengthens only 2 percent against the US dollar.” (It has already strengthened about that much since the summer.)

Find more survey results at http://futureofuschinatrade.com/article/ chinese-supplier-survey-yuan-appreciatio n-will-hurt-exports

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