The wrap up of this year’s annual IMF-World Bank conference of top international economic and finance officials coming just before the release of China’s latest trade statistics is a gift horse that the globe’s economic policy establishment – including its chattering classes – unfortunately keeps looking in the mouth. For the new China trade figures (once again) invalidate much of the conventional wisdom-spouting occasioned by the Washington, D.C. extravaganza.
In a nutshell, the narrative produced by the IMF-World Bank meetings and the attendant commentary is that the global economy faces yet another slowdown and possible transition into a prolonged new stage of mediocre growth largely due to renewed troubles in Europe, the apparent certainty of tighter monetary policies in the United States, and deceleration in the Chinese growth juggernaut. Since the European Union collectively is the world’s biggest economy and the United States follows close behind, these contentions are plausible enough. (Top Federal Reserve officials, however, have made clear in the last few days that if the global economy remains shaky, and threatens U.S. growth, interest rate hikes will be postponed.)
But China’s role in this story remains completely misunderstood. China’s growth has unquestionably benefited the economies of many developing countries and other raw materials exporters (like Australia), as its continually surging manufacturing complex keeps buying their metals, other minerals, and fuels. But when it comes to other third world countries, China’s determination to remain a leading supplier of labor-intensive products arguably has slowed their own ability to industrialize and proceed further down this road of much faster and more reliable growth in the long term.
China’s broader impact, however, has unquestionably been harmful on net, and for years the main problem has been – and continues to be – its growth and the nature of this growth, not the chances of a slowdown. China’s heavy reliance on net exports (i.e., running trade surpluses) for its continued development, and the failure of the United States and the rest of the world to address the resulting government-produced distortions in global production and consumption patterns, combined to set the stage for the financial crisis and its bleak, ongoing aftermath.
Once the recession struck, China’s surpluses declined – especially as a share of its economy. But this trend was almost entirely structural, due to its customers’ weakness, not to Chinese decisions to grow in a more balanced way. Once even a semblance of global recovery began, these surpluses rebounded as well, and lately, they’ve been growing much faster than world GDP.
In fact, the new figures show that from the first three-quarters of 2013 to the first three-quarter of this year, China’s net exports are up just under 38 percent. As a result, China is once again on net a world growth taker, not a world growth maker. It’s true that China’s broader current account surpluse has stabilized at a low level as a share of its total economy. But the expansion of the trade surplus is depriving the United States and the rest of the world of growth in the areas where it’s most needed because it tends to be healthiest – in the realm of everyday goods and services, as opposed to financial flows whose effects on sustainable growth look more uncertain than ever.
Before China’s trade surpluses began taking off once more, its growth slowdown represented an opportunity to substitute production of other goods and services for Chinese-made goods in particular, and start rebalancing global trade and investment flows to achieve much greater sustainability. (As with low-income countries’ generally, China’s role in world services trade remains relatively modest.) That particular opportunity has been squandered, but the United States and the world’s other leading economies can still help lay the foundations for more durable global growth by substituting their own output for imports from China. Only now, much greater pushback against Chinese mercantilism will be required. And if an economic coalition of the willing can’t be mustered, the United States still possesses the market power to achieve this worthy goal on its own.
Tragically, although the final communique issued by the United States and other IMF-World Bank members briefly mentioned that the challenge of rebalancing global growth, trade, and investment remained important, no specific proposals along these lines were included. The main emphasis was placed on reviving global growth as a whole, through a combination of government spending and the kind of domestic structural economic reforms that even dictatorships like China’s find difficult to implement.
This approach might spur more global growth – although it’s the same approach that’s been followed since the crisis broke out, with results no one’s happy with. More likely is the reflation of global imbalances, and another crisis with which the United States and the rest of the world will be even harder-pressed to contain.