Paul Krugman's December 31 New York Times op ed about Chinese mercantilism has had a major effect: the Times is now explaining "dollar mercantilism" to its readers. For example, in a January 7 article about the People's Bank of China starting to raise short term interest rates, Times business writer Keith Bradsher explains the mechanics of "sterilization", the mercantilist government practice of buying foreign currencies.
Bradsher's explanation could have come right out of our book Trading Away Our Future. He not only explains how the People's Bank of China "sterilizes" foreign currencies, but he also explains the effect of those currency manipulations on the United States:
The goal of sterilization is to keep inflation under control in China while keeping the renminbi weak. That helps make China’s exports competitive overseas and preserves jobs in China, while contributing to unemployment in countries producing rival goods.
Bradsher is being very generous with China when he claims that they are simply trying to "keep inflation under control" and preserve "jobs in China". Their actual goal is to steal market share from their trading partners and they prevent inflation by suppressing domestic consumption, partly by making credit largely unavailable to Chinese consumers. Bradsher, comes closer to the true goal of sterilization at the end of the same article:
The central bank is already buying more than $300 billion a year of foreign currencies, mainly dollars, to keep the renminbi weak and preserve the competitiveness of Chinese exports in foreign markets....
Still, he is not completely correct. The Chinese policy is not only to "preserve the competitiveness of Chinese exports," it is also to prevent the competitiveness of products of its victim countries. Chinese currency manipulations not only weaken the renminbi, subsidizing Chinese products, but they also strengthen the dollar, placing a hidden tariff on all U.S. products, wherever they are sold.
The New York Times has made a lot of progress this week. But they still have a long way to go. Mercantilism is the successful beggar-thy-neighbor strategy of maximizing exports and minimizing imports. It can only be stopped when the victim countries insist upon balanced trade.
Disclosure: I hold renminbi, earning interest, through CYB
