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The writer is a He is a senior associate at the Carnegie Endowment for International Peace.
While China and its trading partners continue to clash bitterly over excess manufacturing capacity and global trade, much of the discussion appears to be at cross-purposes.
Chinese overcapacity in specific industrial sectors is an area of contention. Excess Chinese savings driven by suppressed domestic demand is another problem. These two points of contention are very different, but analysts and policymakers on both sides seem to confuse them.
In the first case, Beijing has focused on certain industries, such as electric vehicles and solar panels, that it considers strategically important, and has implemented policies designed to give Chinese producers in these sectors a long-term comparative advantage. There is nothing particularly Chinese about this strategy. Most large economies also employ policies to support or protect advantaged sectors.
Because these policies work at the expense of foreign manufacturers, they often generate a lot of outrage, but much of this reaction is self-serving. Comparative advantage, which is what drives the benefits of trade, implies that some countries are able to produce certain goods more efficiently than others. After all, the purpose of trade is to concentrate production in those countries that have a comparative productive advantage.
But comparative advantage is only achieved in the exchange of goods and not in their production. This is where the problem of excess Chinese savings arises. PorcelainAmerica’s structurally high domestic savings rate is the result of a decades-long development strategy in which income is effectively transferred from households to subsidize the supply side of the economy: the production of goods and services. . As a result of these transfers, household income growth has long lagged behind productivity growth, leaving Chinese households unable to consume much of what they produce.
Some of these subsidies are explicit, but most take the form of implicit and hidden transfers. These include directed credit, an undervalued currency, labor restrictions, weak social safety nets, and overinvestment in transportation infrastructure. These various policies automatically boost Chinese savings. By effectively exporting excess savings through subsidies on the production of goods and services, China can externalize the resulting demand deficiency.
The fact that China dominates certain manufacturing sectors is perfectly consistent with free trade and comparative advantage. It is excess savings that creates a problem for the Global economy – and it should be noted that many countries other than China are adopting similar behavior, including Germany and Japan. The problem is that this excess savings represents the suppression of internal wages and, therefore, of internal demand, to achieve global competitiveness.
These are classic beggar-thy-neighbor trade policies, in which unemployment (a consequence of poor domestic demand) is exported through trade surpluses. These surpluses must be absorbed by trading partners, usually in the form of higher unemployment, higher fiscal deficits, or higher household debt.
This is why the political implications of the two points of controversy are very different. The problem of excess savings can make the problem of excess capacity much worse. Countries with trade deficits seek to protect their economies from excess savings by countries with poor demand. This may take the form of restrictions on trade or capital inflows.
Beijing will undoubtedly continue to protect and support industries it considers strategically important, as will the United States, the EU and the rest of the world. This will inevitably lead to clashes, growing protectionism and widespread overcapacity in some sectors. In a well-functioning global trading system, countries produce goods in which they have a comparative productive advantage and then exchange them for goods in which they do not. Therefore, the global economy is better off, even if individual sectors suffer.
However, when the purpose of exports is to externalize the problem of weak domestic demand, the global economy can only get worse, as John Maynard Keynes pointed out at Bretton Woods. The world must resolve the issue of excess savings and trade imbalance, even as individual countries clash separately over excess capacity and comparative advantage.