China: How Not to Export Your Way Out of a Recession

Includes: CDCAQ, CYB
by: Howard Richman

Wishful thinking is not working. Many trade deficit countries are hoping that growing exports will get their economies moving, but the trade surplus countries are not cooperating. The U.S. economy is stagnating because of our trade deficit with China. The U.K. and Sourthern Europe are stagnating because of their trade deficits with Germany.

Bank of England Governor Merwyn King, U.K.'s equivalent of Fed Chairman Ben Bernanke, understands the problem and sees a possible double-dip recession on the horizon as a result. The London Daily Telegraph (Europe at risk of a double-dip recession) reports:

Mr King said [trade] surplus countries around the world are not stimulating enough to offset belt-tightening by deficit states such as the U.K., U.S. and Spain, citing the eurozone as a "microcosm" of the problem. "I was struck by the mood at the G7 meeting in Canada, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth in their economy. That can't be true of everybody," he said.

King recommends that the trade surplus countries stimulate their economies. This would work for Europe, but not for the United States. Even if China stimulates its economy, it won't increase its imports from the U.S. In 2009, the Chinese government stimulated demand for Chinese-produced goods only. The Chinese economy grew rapidly, but China's goods imports from the United States did not grow.

In December, China accelerated its exclusion of American products when it issued new rules requiring that American corporations move their R&D and patents to China in order to do business with the Chinese government.

There is a solution. The U.S. could invoke the special WTO rule which lets trade deficit countries restrict imports. We could tell the Chinese government that, from now on, our imports from them will be tied to their imports from us.

Disclosure: I own Chinese yuan through CYB