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Bernanke Is Right Chinese Mercantilism, Not Fed Easy Money, Are Making a Mess
Guest post by Peter Morici
 Ben Bernanke is right. Germany shouldn’t blame easy money in the United States for the world’s woes.
 Currency mercantilism in China and elsewhere is causing a mess-especially in the United States. 

Unemployment in the Midwest is imported in containers like these from China.

Last week, Bernanke fingered China, Taiwan, Singapore, and Thailand for driving down the values of their currencies. Through massive government purchases of U.S. Treasuries securities, those mercantilists accomplish huge trade surpluses and jack up their GDP growth and employment. The flip side is a huge U.S. trade deficit that sentences Americans to slow growth and 10 percent unemployment.
 Sadly, such mercantilism makes free trade an unworkable strategy for the United States.
  Global demand for goods and services has become so distorted by subsidized Asian exports that workers in the United States face terribly high unemployment. Add in those stuck in part-time jobs that would prefer full time work, and the United States is losing the productivity of at least 10 million workers. At about $100,000 per worker, that adds another $1 trillion, bringing total lost productivity to about $1.3 trillion dollars.
 Ben Bernanke estimates U.S. capacity underutilization at about 8 percent-that comes to the same $1.3 trillion. Amazing!
 At the recent IMF meetings, Treasury Secretary Geithner asked European allies for help in persuading China to revalue the yuan. Led by Germany, the United States was told to pound salt and instructed to slash its budget deficit and tighten monetary policy.
 No surprise. Germany enjoys huge trade surpluses with a euro that is undervalued for its economy, because it is lumped into Euroland with weak Portugal, Ireland, Greece, Spain and Italy. Germans live well and impose austerity and unemployment on those neighbors. Berlin doesn’t want any sacred mercantilist cows slayed, lest its own ruse get discovered.
 If the United States cut its budget deficit in half and raised domestic interest rates two percentage points, U.S. consumption and imports would crash, unemployment would rocket to 15 percent, and a global depression would result whose horrors we all thought were long ago buried in history books.
 If China and Germany won’t be reasonable, the United States is really left with no option but to take direct action to balance its trade.
 China’s government purchases to suppress the yuan come to about 35 percent of GDP and provide a subsidy on exports of similar amount. Washington should even things up by imposing a comparable tax on purchases of yuan and euro for the purpose of importing from or investing in China and Germany, until their leaders agree to engineer an orderly revaluation of currencies and trade.
 The Chinese and Germans shouldn’t care-after all, the Americans are nothing but whining spendthrifts whose problems are of no import. They would scream bloody murder anyway. 
Beneath the howls, domestic demand and employment in the United States would fire up, manufacturing would flourish, GDP growth rise to about 5 percent, and unemployment would fall to a similar figure.
 The extra growth would eventually balance the U.S. budget, as it did during the Clinton years.
  Once China, Germany and others agreed to a realignment of exchange rates and the tax ended, all nations would benefit from trading with a more rapidly growing and stable U.S. economy. 
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

1 thought on “Chinese Mercantilism, Seconded by Germany…

  1. Ames Tiedeman says:

    The United States has not had a current account surplus since 1975. We have not had a trade surplus with Japan since April, 1976. We have been in deficit with the EU since 1983. We have run trade deficits with both Russia and China for more than 20 years. How did America go from being the largest creditor nation in 1975 to the largest debtor nation by the end of the 1980’s? To understand what has happened one must go back in time. Prior to 1860 much of the Western World practiced Mercantilism. After 1860, led by Great Britain, Mercantilism was abandoned in favor of the teachings of John Locke and the free trade principles of Adam Smith. Trade barriers throughout Europe came down. A great debate on economic policy took place in America. Lincoln for instance was a Mercantilist. For the next 110 years the Western World basically traded with itself. Good flowed across the Atlantic and trade disputes if they arose were generally settled quickly. By 1970 the world was changing. The post world war II era produced the eventual rise of Japan as an economic machine. Goods started to flow from Japan to the United States and to Europe. The problem was that goods were only flowing one way. America for instance was banned by Japan from selling rice or apples to Japanese consumers. While disputes like this in many industries were festering, Japan was quietly becoming a world power in automobile and electronics manufacturing. Auto’s and electronics were exported out of Japan at an ever faster clip. By 1977 Japan was running steady trade surpluses with the United States and American politicians were raising alarms that Japan was simply practicing protectionism. What Japan was really doing is practicing a new form of Mercantilism which I have pegged, “Asian Mercantilism.” Japan was more concerned with full employment in Japan than the loud voices of western politicians. By the late 1980’s the United States and Europe were both running huge trade deficits with Japan. After 15 years of trade deficits America had found herself in the position of having gone from being the world’s biggest creditor nation to being a debtor nation. The rise of China over the past 20 years has given the world another Japan but this time on steroids. If Japan practices Mercantilism then China practices Supra Mercantilism: Goods are exported, imports are controlled. The currency is massively controlled, not free floating. Production is favored over consumption. With a population of 1.5 billion China has been able to give Mercantilism a whole new dynamic. What we have in the world today are two competing economic models for prosperity. We have the Western model with relies on the system of Free Trade and we have the Asian system with relies on a super sized form of Mercantilism. We have the West running trade deficits and the Asians running trade surpluses. China, Japan, and South Korea are the producers of goods while Europe and America are the consumers. Who is winning the battle between Western Free Trade and Asian Mercantilism? Asia is clearly the winner. The question going forward needs to be how we reverse a trend that is leaving America and much of the western World indebted and economically broken. What the West now calls protectionism, the Asians call Mercantilism

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