First, I want to start by saying that I have a deep respect for Paul Krugman. I've studied his Nobel Prize winning models for New Trade and think the consumer love of preferences work is remarkable. However, that being said, some of his recent comments on China currency appreciation are not economically efficient.
In an opinion piece, Krugman argues that Congress should impose tariffs on Chinese imported goods since the Chinese are manipulating their currency. I agree that a relative reduction in the dollar is good for US exports, as they are more attractive to the world; however, beggar-thy-neighbor tariff policies will achieve nothing. A few things I am going to focus on:
1. Tariffs create deadweight losses and are not economically efficient.
2. As Krugman mentioned, the renminbi exchange rate is appreciating, I argue at a more rapid pace.
3. Short-term job gains in the US at the expense of a long-term trade relationship are shortsighted.
First, imposing tariffs on Chinese imports is a zero sum game. China will impose similar tariffs on US imported goods which will hurt exporters in the US. The Chinese imposed tariffs would create inefficient deadweight losses as the number of firms that want to export to China won't equate to the demand for imports.
Secondly, I was recently on a trade mission to China and everyone we met with expressed a large concern over inflation. Chinese officials are worried that increases in food prices can cause potential unrest. Therefore, the renminbi will appreciate to quell these fears. Krugman is afraid that it may take 3 to 4 years; however, I argue that it will occur more rapidly as inflation is the number one concern.
Lastly, China is the 3rd largest export market for the US, after Canada and Mexico. I was at a US-China Business Council event this morning and John Frisbie of the USCBC said "The Chinese import market from the US has potential of $200B today". Currently, the Chinese import about $120B from the US.
In China's latest 5-year plan, the government stressed increasing domestic consumption from 35% of GDP to 50% of GDP. A 15% increase in domestic consumption from the 2nd largest economy in the world is an attractive opportunity for exporters. Soiling the trade relationship by imposing tariffs now will only prevent the US from capturing huge gains, and jobs, in the not too distant future.
In an opinion piece, Krugman argues that Congress should impose tariffs on Chinese imported goods since the Chinese are manipulating their currency. I agree that a relative reduction in the dollar is good for US exports, as they are more attractive to the world; however, beggar-thy-neighbor tariff policies will achieve nothing. A few things I am going to focus on:
1. Tariffs create deadweight losses and are not economically efficient.
2. As Krugman mentioned, the renminbi exchange rate is appreciating, I argue at a more rapid pace.
3. Short-term job gains in the US at the expense of a long-term trade relationship are shortsighted.
First, imposing tariffs on Chinese imports is a zero sum game. China will impose similar tariffs on US imported goods which will hurt exporters in the US. The Chinese imposed tariffs would create inefficient deadweight losses as the number of firms that want to export to China won't equate to the demand for imports.
Secondly, I was recently on a trade mission to China and everyone we met with expressed a large concern over inflation. Chinese officials are worried that increases in food prices can cause potential unrest. Therefore, the renminbi will appreciate to quell these fears. Krugman is afraid that it may take 3 to 4 years; however, I argue that it will occur more rapidly as inflation is the number one concern.
Lastly, China is the 3rd largest export market for the US, after Canada and Mexico. I was at a US-China Business Council event this morning and John Frisbie of the USCBC said "The Chinese import market from the US has potential of $200B today". Currently, the Chinese import about $120B from the US.
In China's latest 5-year plan, the government stressed increasing domestic consumption from 35% of GDP to 50% of GDP. A 15% increase in domestic consumption from the 2nd largest economy in the world is an attractive opportunity for exporters. Soiling the trade relationship by imposing tariffs now will only prevent the US from capturing huge gains, and jobs, in the not too distant future.
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