Paul Krugman’s Dec. 31 column “Chinese New Year” highlights the increasingly rancorous tone in the debate over America’s response to Chinese trade surpluses. The Nobel Prize-winning economist endorses protectionism as a response to American under-employment, defying the very broad consensus among mainstream economists for free trade, and basically dares China to respond by dumping its holdings of U.S. Treasurys.
The column turns conventional wisdom about the U.S.-China trade relationship on its head. Students of economics have been told ad nauseam for decades that it was rising trade protectionism, epitomized by the infamous Smoot-Hawley Tariff, that put the final nail in the global economy’s coffin in 1930. But Krugman approvingly quotes the recently deceased Keynesian economist Paul Samuelson as saying that mercantilist policies are actually appropriate when employment is “less than full.”
Similarly, the possibility that Beijing might sell off its massive holdings of U.S. Treasurys is often treated as a doomsday scenario, but Krugman is positively sanguine about the prospect. Such move by China “would probably weaken the dollar against other currencies - but that would be good, not bad, for U.S. competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank-you note.”
A reader might wish Krugman had backed up his argument more fully. Aside from briefly quoting Samuelson, he does little to explain why protectionist policies are an appropriate response to underemployment. And one suspects many economists will take issue with his statement that “China’s bond purchases make little or no difference” to U.S. interest rates.
All in all, it is striking that one of the most respected and influential economists in the U.S. is starting the new year by essentially calling for a trade war with China. Krugman’s arguments are similar to those made for years by trade unions and congressmen, usually dismissed by leading economists. And Krugman matches any congressional China basher in the stridency of his tone, calling China’s currency policy “mercantilist” and “predatory.” The tenor of the debate seems to have shifted, and not in China’s favor.
– Aaron Back