Another good China post from Setser

Brad Setser has another great post about China. It's often hard to unravel the complicated language of international trade, and understanding the underlying models is even harder. That's why most people tend to fall back on mercantilism, the simple idea of "exports good, imports bad." But Setser does a great job of leading us out of the cave.

Basically, the idea is this:

1. China wants companies to build their factories in China, so that Chinese people can have jobs and Chinese companies can learn new technologies.

2. So, China makes its currency (the RMB) very "cheap". So it's easier for us to buy Chinese-made products, but harder for Chinese people to buy our products.

3. This means that Chinese people have to pay more for American products (like Coke, or IBM computer chips, or wheat, or Google ads, or Boeing airplanes). But they don't get to pay any less for Chinese products. So Chinese people are basically poorer than they could be.

4. The Chinese government, meanwhile, has to buy a lot of U.S. government bonds to keep its currency "cheap". But, eventually, these bonds will get less valuable. So China's government is setting itself up for a fall.

That's the basic rundown.

Another, even more famous economist named "Brad" - J. Bradford DeLong - has suggested that it's bad for the U.S. to pressure China to change its economic strategy. He warns that, if we do that, and if China's economy goes bad, Chinese people will blame us in the future. According to DeLong:

There is nothing more dangerous for America's future national security and nothing more destructive to America's future prosperity than for Chinese schoolchildren to be taught in 2047 and 2071 and 2075 that America tried to keep the Chinese as poor as possible for as long as possible.

Dire.

But Setser argues that, if the Chinese model goes bust, we may get blamed anyway:

When the time comes for China to realize the losses that are now accumulating quietly on the PBoC’s balance sheet (and soon on the balance sheet of the state foreign investment company), I doubt China’s leaders will say, “you know, these losses were really incurred years ago, when we decided to sink a lot of Chinese savings into depreciating dollars in order to encourage our export sector and make it attractive for foreign firms to locate investment in China. We shouldn’t blame the US for the fact that China’s investments in the US haven’t done well. We were the ones who over-paid for US assets.”

I suspect China’s leaders will be somewhat less magnanimous. They will argue that the losses didn’t stem from China’s policy over-paying for US assets, but rather from the failure of the US to adopt the policies needed to maintain the value of Chinese investment in the US.

Basically, it's damn hard to make sure we get on the good side of China 2075, from where we sit in 2007. In fact, to me, worrying about the opinions of the schoolchildren of China of 70 years hence sounds a little ridiculous. Let's worry instead about keeping the global economy (and environment, and society) healthy in the here and now).