Stephen S. Roach
2011-10-28
NEW HAVEN – The United States has a classic multilateral trade imbalance. While it runs a large trade deficit with China, it also runs deficits with 87 other countries. A multilateral deficit cannot be fixed by putting pressure on one of its bilateral components. But try telling that to America’s growing chorus of China bashers.
America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government. It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity. It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth.
In the US, there simply is no net saving any more. Since the fourth quarter of 2008, America’s net national saving rate has been negative – in sharp contrast to the 6.4%-of-GDP averaged over the last three decades of the twentieth century. Never before in modern history has the world’s leading economic power experienced a saving shortfall of such epic proportions.
Yet the US found a way to finesse this problem. Exploiting what Valéry Giscard d’Estaing called the “exorbitant privilege” of the world’s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance-of-payments, or current-account, deficits to attract foreign capital.
The US current account, which was last in balance in 1991, hit a record deficit of $801 billion (6% of GDP) in 2006. This gap has narrowed in the past couple of years, but much of the improvement probably reflects little more than the temporary impact of an unusually tough business cycle.
This is where America’s multilateral trade deficit enters the equation, for it has long accounted for the bulk of America’s balance-of-payments gap. Since 2000, it has made up fully 96% of the cumulative current-account shortfall.
And that is what ultimately makes the China-centric blame game so absurd. Without addressing the root of the problem – America’s chronic saving shortfall – it is ludicrous to believe that there can be a bilateral solution for a multilateral problem.
Yet that is exactly what US officials, together with many prominent economists, believe America needs. Since the trade deficit is widely thought to put pressure on US jobs and real wages, the US-China trade imbalance has come under special scrutiny in these days of great angst. Yes, China does account for the largest component of America’s multilateral trade deficit – making up 42% of the total trade gap in 2010. Conscious outsourcing and supply-chain management decisions by US multinationals play an important role in exaggerating China’s share. But that does little to let China off the hook in the eyes of Washington.
Long-standing charges of currency manipulation provide the proverbial smoking gun that US politicians – of both parties – believe justifies the imposition of steep tariffs on China’s exports to the US (which totaled $365 billion in 2010). That was precisely the argument behind the US Senate’s recent overwhelming approval of a “currency bill” that took dead aim on China.
While it may be convenient to hold others accountable for America’s problems, this is bad economics driving bad politics. In an era of open-ended US government budget deficits and chronic shortfalls in personal saving, America is doomed to suffer subpar savings and massive multilateral trade deficits for as far as the eye can see.
In that vein, closing down trade with China, while failing to address the saving shortfall, is like putting pressure on one end of a water balloon. The Chinese component of America’s multilateral trade deficit will simply migrate somewhere else – most likely to a higher-cost producer. That would be the functional equivalent of a tax hike on beleaguered American families – hardly the solution that US politicians are promising.
This is not to ignore important US-China trade issues that need to be addressed. Market access should be high on the agenda – especially for a sluggish US economy that needs new sources of growth, like exports. With China now America’s third largest – and by far its most rapidly growing – export market, the US should push hard to expand business opportunities in China, especially as the Chinese economy tilts increasingly toward internal demand. China should be viewed as an opportunity, not a threat.
At the same time, the US government should come clean with the American public about charges of Chinese currency manipulation and unfair trade practices. The renminbi has, in fact, appreciated by 30% relative to the US dollar since mid-2005. In broad multilateral terms – a far more meaningful gauge because it measures a currency’s value against a broad cross-section of a country’s trading partners – the “real effective” renminbi currently stands about 8% above its most recent 12-year average (1998-2010).
Yes, China continues to accumulate a vast fund of foreign-exchange reserves. But this is as much the result of speculators’ “hot money” plays as it is a conscious and perfectly reasonable effort by Chinese policymakers to remain focused on financial stability and manage currency appreciation in a gradual, disciplined, and orderly fashion.
China-bashing in the US speaks to a corrosive shift in the American psyche. It deflects attention away from those truly responsible for perpetuating the greatest saving shortfall in history. Washington has been seduced by the political economy of false prosperity. That seduction has encouraged America to squander its savings and live beyond its means for nearly two decades. Now the game is up.
The ultimate test of any nation’s character is to look inside itself at moments of great challenge. Swept up in the blame game, the US is doing the opposite. And that could well be the greatest tragedy of all. After all, America’s 88 deficits did not arise of thin air.
Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and the author of The Next Asia.
Copyright: Project Syndicate, 2011.
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