Concern over Chinese mercantilism is growing

Gideon Rachman reports from Davos:

Larry 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.

Paul Krugman notes that this is something he's been saying for a while now:

China is pursuing a mercantilist policy: keeping the renminbi weak through a combination of capital controls and intervention, leading to trade surpluses and capital exports in a country that might well be a natural capital importer. We also know, or should know, that this amounts to a beggar-thy-neighbor policy — or, more accurately, a beggar-everyone but yourself policy — when the world’s major economies are in a liquidity trap.

But how big is the impact?...[the]Chinese current account surplus for 2010-2014 [is projected at] 0.9 percent of gross world product.

You can think of this as a negative shock to rest-of-world net exports...In turn, this negative shock is like a negative shock to government purchases of goods and services. So it should have a similar multiplier. Multiplier estimates are all over the place, but tend to cluster around 1.5. So we’re looking at a negative impact on gross world product of around 1.4 percent. Not huge — China isn’t the principal obstacle to recovery — but significant.

And, if we think of the United States as bearing a proportionate share, and also use the rule of thumb that one point of GDP = 1 million jobs, we’re looking at 1.4 million U.S. jobs lost due to Chinese mercantilism.

This pushback has yet to become the CW. Even Rachman calls Summers' comments a "flirtation with protectionism", and Ryan Avent has labeled criticism of Chinese mercantilism "zero-sum thinking". And on the left, Matt Yglesias and others of the "Don't Anger the Dragon" school of thought are still pointedly silent on the issue. But there is a growing chorus of center-left elite opinion - Krugman, Wolf, maybe even DeLong - who believe that problems arise when the world's biggest exporter plays a mercantilist game in a system where everyone else is playing free-trade.

Update: The Obama administration seems to share Krugman's concerns (and is considering steps to fight Chinese trade barriers), but the big test is whether it's willing to brand China a "currency manipulator". Stay tuned...

And Paul Krugman explains why China's reserve accumulation (holding of trillions of dollars of U.S. debt) is a direct consequence of their undervalued exchange rate.

And here's the China article of the day: Chinese belligerence toward the U.S. is growing as fast as Chinese wealth. One more nail in the coffin of the idea that they'd be our buddy if we'd just (accept their mercantilism/ ignore their human rights record/ stop researching new weapons systems/ throw Taiwan under the bus).