Summers Is Wrong: U.S.-China Relationship Is Not Fine

by: Howard Richman

Just before China announced plans to slap tariffs of 43.1%-105.4% on American chicken parts, President Obama's chief economic advisor Lawrence Summers told Judy Woodruff that everything was fine in our China relationship. Business Week reported:

Summers downplayed friction between the U.S. and China, including charges that a recent computer attack targeting Google Inc. came from China. The relationship between the two nations is resilient enough to withstand occasional dust-ups, he said.

But nothing has been fine in our economic relationship with China for the entire decade of the 2000s. Over that decade China engaged in massive currency interventions in the dollar-yuan market so it could minimize imports and maximize exports. Many of the other Asian countries did the same. As a result, the U.S. lost 5.7 million manufacturing jobs, as compared to just 0.5 million lost during the previous decade.

Unfortunately, Summers is a slow learner. So far, his education has cost the United States over a million manufacturing jobs and has cost the Democratic Party two Gubernatorial seats and a Senate seat. During the next three years, his education will probably cost his boss's party the Presidency, the House and the Senate.

But there is still hope that he can learn. His statements at the annual summit of world economic leaders in Davos Switzerland at the end of January show some progress. The Financial Times had two reports about his comments. One was from Martin Wolf:

Lawrence Summers, Mr Obama’s principal economic adviser, also stressed that “what we are seeing in the US and perhaps in other places, is a statistical recovery and a human recession”. In his view, the combination of high unemployment with “mercantilist policies” in parts of the world makes it hard to defend liberal trade politically or perhaps even intellectually. Unless the recovery proves far stronger than expected, high unemployment will persist in western countries, with all the political dangers it brings.

The other from Gideon Rachman:

Mr Summers was careful to say that the US remains committed to open trade and can gain from globalisation. But he also pointed out that Paul Samuelson, a famous economist (and uncle of Mr Summers), had argued that the case for free trade might not apply when countries were trading with nations that were pursuing mercantilist policies. The reference to China did not need to be spelled out.

In time, Summers may even pay attention to what his Nobel Prize winning uncle used to argue. Or he might read the chapter about mercantilism in John Maynard Keynes magnum opus, The General Theory of Employment Interest and Money, in which Keynes related how he started his economics career as the free-trade ideologue that Summers still is. And then how he looked closely at the real world and discovered that mercantilism produces prosperity in the mercantilist countries and persistent depression in the victim countries. He concluded:

(A) favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Currently, the United States and Europe are experiencing the state of persistent depression, predicted by Keynes. Yet Summers tells Judy Woodruff that everything is fine.

Disclosure: I own Chinese yuan through CYB