Looking for a Villain, and Finding One in China

The New York Times

April 18, 2004
By EDUARDO PORTER

REMEMBER when China was exporting deflation? It was only a
couple of years ago when economists warned that the
country's cheap manufactured exports could push the world
dangerously close to a spiral of ever-lower prices.

"The Chinese economy has certainly emerged as an important
ingredient in the U.S. deflation story," warned Stephen S.
Roach, chief economist of Morgan Stanley in October 2002.
The World Bank also chimed in: "China's overreliance on the
external sector 'exports' China's own deflation to the rest
of the world."

Well, that's over. In March, inflation reared its head in
the United States. The Labor Department reported that in
the first quarter of the year, consumer prices rose at an
annual pace of 5.1 percent. But despite this U-turn in the
outlook for prices, one thing didn't change: China is still
part of the problem.

Carl B. Weinberg, chief economist of High Frequency
Economics, wrote to investors last week that "China's
crowding into world commodity markets will boost perceived
inflation in all the world's economies for a long time
unless its growth trajectory is crimped." As an uncertain
recovery in the job market and a bloated trade deficit
stoke a lingering economic malaise in the United States,
the prospect of China emerging as a competitor on an equal
footing has led economists, businessmen and politicians to
blame it for every economic woe.

Almost every politician, it seems, agonizes over China's
vast labor force sucking in the world's industrial jobs. A
few fret about China becoming too large a consumer market,
enabling it to dictate terms to American businessmen and
policy makers.

Some concerns are warranted. China's fast growth has been
the major force behind the surge in commodity prices. Last
year it ate up half the world's concrete output, a quarter
of its steel production, a fifth of its copper and about 40
percent of its coal.

Moreover, China's entry into several markets, from toys to
T-shirts, pretty much wiped out the other producers. "There
are bound to be uneven effects in sectors they buy from and
sectors that compete with them," said Jagdish Bhagwati, an
economist at Columbia University.

But to hear some economists, it would seem that China has
locked United States businesses in a deadly kung-fu grip.
In a recent paper, John H. Makin of the American Enterprise
Institute said China is choking off the profits of American
companies with its hunger for commodities pushing up the
price of raw materials and its cheap labor holding down the
price of finished goods.

Even as China soaks up the world's manufacturing jobs, Mr.
Makin wrote, Chinese workers are not spending their
paychecks, salting them away instead in savings accounts
and thus creating an imbalance between booming supply and
weak demand.

Congress has tried to come to the rescue. In February, a
bipartisan group of senators argued that China's
undervalued currency has played a "major role" in the loss
of 2.6 million American manufacturing jobs, and submitted a
bill to slap a punitive tariff on Chinese imports.

But many economists, including Mr. Bhagwati, argue that
China is getting a bum rap. "China's net effect on us is
much less than what we think," Mr. Bhagwati said.

For instance, critics in the United States point to last
year's $124 billion trade deficit with China as proof that
the country is destabilizing the global economy by adding
too much demand and too little supply. But China's global
trade surplus last year reached only $16 billion- a better
balance of supply and demand than the United States' $517
billion global deficit.

Besides, "much of our bilateral deficit with China is the
transfer of previous deficits with Korea and Taiwan," said
Clyde V. Prestowitz, a trade adviser in the Reagan
administration who heads the Economic Strategy Institute.
" Most of what China sends to us we stopped making back in
the 1970's and 1980's."

Other economists argue that China's impact on prices is
also overstated. In a recent study, economists at the
Federal Reserve tried to figure out whether China was in
fact exporting inflation or deflation to its trading
partners. They concluded it was too small to do that. China
accounts for only 5 percent of global exports and global
gross domestic product, the study noted, and "the impact of
Chinese exports on global prices has been, while
non-negligible, fairly modest."

Fears of an Asian menace have come and gone before. The
recession in the early 90's prompted dread that Japan would
become the world's pre-eminent economic power, opening a
Japan-bashing season that featured Americans smashing
Toyotas with sledgehammers.

What seems to trouble Americans most about China is not its
current economic impact, but what it might become.
According to Goldman Sachs, China's economy will be bigger
than America's by 2041. "It has the potential to displace
the U.S.A. as the numero uno," said Mr. Prestowitz of the
Economic Strategy Institute. "That's the bottom line."

Mr. Weinberg at High Frequency says that Americans will
stop worrying about the current Asian menace when they feel
better about their own economy. "If we were creating
200,000 jobs a month no one would care about China," he
said.

The United States might then choose to see China as an
upbeat influence: the supplier of cheap manufactured
products that helps keep American consumer prices low; a
key export market; and a major underwriter of the United
States' budget deficit, which plows its savings into
Treasury bills, contributing to America's economic recovery
by helping keep interest rates low.

With fears of deflation dissipating, Mr. Roach at Morgan
Stanley has taken to a more upbeat view of China's
influence on the world: "We ought to be thanking the
Chinese," he wrote last month.

But Americans probably won't.