Chinese trade policy: scourge of the poor

Arvind Subramanian, writing in the Financial Times, explains why Chinese mercantilism hurts the poor in other developing countries:

[T]he real victims of [China's currency] policy are other emerging market and developing countries – because they compete more closely with China than [with] the US and Europe...In fact, developing countries face two distinct costs from China’s exchange rate policy.

In the short run, with capital pouring into emerging market countries, their ability to respond to the threat of asset bubbles and overheating is undermined...

But the more serious and long-term cost is the loss in trade and growth in poorer parts of the world. Dani Rodrik of Harvard University estimates that China’s undervaluation has boosted its long-run growth rate by more than 2 per cent by allowing greater output of tradable goods...

Higher tradable goods production in China results in lower traded goods production elsewhere in the developing world, entailing a growth cost for these countries. Of course, some of these costs may have been alleviated by China’s rapid growth and the attendant demand for other countries’ goods. But China’s large current account surpluses suggest that the alleviation is only partial.

These emerging market victims of China’s exchange rate policy have remained silent because China is simply too big and powerful for them to take on. And this despite the fact that disaffected constituencies now encompass not just companies but also [developing country] central bankers, who have found macro-economic management constrained by renminbi policy.

Hence the third consequence. By default, it has fallen to the US to carry the burden of seeking to change renminbi policy. But it cannot succeed because China will not be seen as giving in to pressure from its only rival for superpower status. Only a wider coalition, comprising all countries affected by China’s undervalued exchange rate, stands any chance of impressing upon China the consequences of its policy and reminding it of its international responsibilities as a large, systemically important trader.

It is time to move beyond the global imbalance perspective and see China’s exchange rate policy for what it is: mercantilist trade policy, whose costs are borne more by countries competing with China – namely other developing and emerging market countries – than by rich countries. The circle of countries taking a stand against China must be widened beyond the US to ramp up the pressure on it to repudiate its beggar-thy-neighbourism. But progress also requires that the silent victims speak up.

Now keep in mind, most economists believe that China's currency policy also hurts the poor in rich countries (for example, the United States) by reducing the share of national income that goes to labor (and thus raising the share of income that goes to capital). China's artificially undervalued yuan makes their labor look cheaper than it would otherwise be, forcing our workers to either get fired or take wage cuts in order to keep their jobs. This may be one reason why real income in the U.S. has stagnated since the day China joined the WTO in 2001.

And keep in mind that China's currency policy also hurts the poor in China. An artificially cheap yuan means Chinese workers and peasants can't buy as many imported goods (mainly food). It holds down the wages of workers and raises the profits of factory owners.

Thus, China's mercantilism is hurting poor people all over the world. Which raises the question: Why don't more liberals rail against this policy? Are they supporters of the Yglesias/DeLong argument that any pushback against any Chinese policy will result in a New Cold War? Or are they simply loath to criticize a country that neocons also happen to (sometimes) criticize? Or have they simply not woken up to what's going on?

Looking at the more general picture, in China we have a country whose economy is in many ways a Frankenstein of the worst excesses of Dickensian dog-eat-dog capitalism and government-corporate cronyism. A country whose mercantilism takes money out of the pockets of the world's poor and puts it into the pockets of the world's rich; where environmental degredation on a scale the U.S. has never even seen is encouraged and defended as a source of competitive advantage; where basic human rights and civil liberties are widely denied - where speaking out against corruption or defending the poor in court often lands you in jail. A country that crushes indigenous cultures (Tibet, Xinjiang) and encourages nuclear proliferation.

In other words, you'd think China would feature prominently on the shit-lists of my fellow American liberals. Why doesn't it yet? Conservatives, for their part, are starting to openly admit their love affair with a country that has allowed them to win the class wars here at home.

Update: Ryan Avent, blogging for The Economist, has become something of one of the blogosphere's biggest defenders of Chinese mercantilism (examples here and here). This is perhaps unsurprising, given who he works for...but it's still a bit troubling, as Avent is both a smart guy (meaning he shouldn't be the type of guy to hunt down and pounce on any whiff of "protectionism"; the real world is more nuanced) and a liberal guy (meaning he should give more thought to the arguments given in my post above).

Update 2: Yglesias links to Subramanian's article! Could this be the beginning of a glimmer of the beginning of Yglesias' abandonment of the "Don't anger the Dragon" ethos?