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I agree that a high discount peg weakens wage bargaining power in other countries, but still it means to give away one's goods for less than a free market price.
The idea, why economists have thought it might work out for both China and US, was that the US economy is so flexible and innovative, that even when losing old jobs, the US would easily create new jobs in different branches. So while China would get jobs, the US would get cheap products and still could have low unemployment (which is confirmed in a sense by the numbers of the past years).
The bad thing was, that too much of the extra working and credit capacity was only used in the credit distribute branch, instead of productive branches. It could have worked, if the extra work and capital capacity provided by the Chinese peg would have been used for investing in the future, like fossil fuel replacement...
Then at some point the Chinese imports would have replaced e.g. oil imports and it would not have distorted the long term US current account balance.

I don't think at all, that the Chinese gov is happy with the current situation. They just don't know how to come out. This is of course to some degree speculation, but it is clear, that abolish the current arrangement would create distortion in China. It is as well clear, that currently some investment is done in China, which won't be profitable any more, once the exchange rate moves significantly up. And keeping export subsidies going indefinitely is expensive.

The CA deficit of the US is much larger than the Chinese surplus. -> The responsibility for the US CA deficit is certainly not mainly China's.
China-EU trade is bigger than China-US trade. -> Everything which is due to China in the US economy should occur here, too (yes pressure on wage bargaining power is in the EU, too, but the CA deficit is much smaller).

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sun Jun 1st, 2008 at 04:36:20 PM EST
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