Yes, America needs to save and produce more, and China needs to spend and consume more. Getting there presupposes a functioning trade system. If developed nations add to protections bit by bit, China will simply collapse as its export lifeblood goes dry. China, it’s worth recalling, has 1.3 billion people and nuclear weapons.
The role of the superpower with the popular new president in this situation is to provide leadership. There is a deal to be struck, in which America leaves its markets open and quits fretting about China’s currency, while China adopts policies to boost wages and pursues a consumption oriented stimulus. That’s a deal that leaves everyone better off[.]
It sounds to me as if Avent is thinking relatively little about the economics of the issue, and a lot about the diplomacy side of things. In other words, he's using the dread spectre of Protectionism to motivate people not to Anger China.
On the economics of it, he's probably right - a deal wherein China boosts domestic consumption would be better off for both China's people and America as a whole. The assumption here is that China's leaders want what's best for China's people. Keeping the populace happy and non-rioting is important to Hu Jintao and Co., but so might be A) keeping control of the economy in government hands, B) building up capital-intensive industries that will be useful for military advancement, C) maintaining the leverage over America that comes with $2 trillion in foreign currency reserves, D) keeping the payouts rolling to all the graft-happy local officials who form the party's true power base, etc. In other words, there is no guarantee China will make the deal that Avent suggests.
It has been interesting, and a little frightening, to watch the combat between those liberals who resent China for taking our jobs and those who fear that angering China could lead to a new Cold War. I generally fall in the first camp, largely because I don't really believe that China's opinion of us is something we can effectively control. Protectionism is generally bad policy. But it's not bad because it pisses off some angry autocrats who get pissed off every week as political theater.
Update: Krugman and Yglesias both note that the "buy American" provision in the stimulus is useful if and only if we can't convince China to A) enact an even bigger stimulus, and B) make sure they don't devalue their currency. As for how we get China to make this deal, neither Krugman nor Yglesias offers any ideas.
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