Michael Pettis

Is Governor Zhou a Closet Bernanke-ite?

Thanks Ma-lin, but I am not sure I agree with your historical observation – a fairly widespread one, it seems – that China has always run trade surpluses. I haven’t looked at Roman era trade and don’t have any feel for it, but the Ming and Qing trade, in which China largely exported silk, tea and porcelain and imported silver, at least until the early 19th century when opium replaced silver, has often been mistakenly compared to modern trade surpluses which are balanced by reserve accumulation, with silver taking the place of reserve accumulation. But besides being anachronistic – China of course did not have a central bank and did not try to accumulate reserves – this version of history may misrepresent Chinese needs at the time.

In the mid-Ming period China experienced a collapse of its money system. This resulted in and was exacerbated by silver hoarding, which became worse after Japan, China’s major source, cut off silver exports in response to declining silver stocks in Japan. Fortunately for China the Spanish colonization of the Americas resulted in massive silver discoveries in the 16th Century and was the main cause of burgeoning trade between China and Europe. China desperately needed silver to re-monetize its monetary system, for which it exported silk, tea, porcelain, and other goods, and European wanted those goods and were willing to exchange it for the suddenly plentiful silver.

In fact historians estimate that one-third of all American silver ended up in China. If China was simply passively accumulating silver as the clearing of its trade surplus, this would have been almost impossible – why would China give up so much real production for passively accumulating silver, and why did the monetary system strengthen rather than collapse? By the way the Qianglong’s “famous reply” probably had to do more with domestic court politics and factional infighting (between “openers” versus “closers”, a long Chinese tradition) than with any real description of trade needs.

By the end of the 18th century, with the drying up of silver from the Americas, the silver drain started to become a serious problem for Europeans, which is when the British hit on the idea of “balancing” trade by exporting Indian opium to China. In fact, contrary to what one would have expected if China merely passively accumulated silver, there is quite a lot of evidence that the Chinese emperor turned against opium imports not because of the deleterious effect on the Chinese people but rather because China’s growing economy and monetary system needed silver, and with the importation of opium the Chinese monetary system began experiencing the consequences of a too-tight monetary conditions.

I think we have to be careful about these kinds of arguments because we assume things are immutable that are not. Until the early 1990s everyone talked about how Asian trade surpluses were the consequence of culture and not monetary and trade policy, but in then until 1997 Asian trae accounts went wildly into deficit until the 1997 crisis scared policymakers into engineering trade-surplus policies. I think policies and economic conditions do matter to the trade account, at least as much as culture does.

As for your import duty proposals, this might have had the effect you say, but it probably would have violated the WTO and would have set a terrible precedent for a country that is eager to encourage free trade.