China's Wrong Turn on Trade; by Accident or Design, China Has Embraced Export-Led Economic Growth. the Centerpiece Is a Wildly Undervalued Exchange Rate

Article excerpt

Byline: Robert J. Samuelson

It sometimes seems that almost everything we buy comes from China: DVD players, computers, shoes, toys, socks. This is, of course, a myth. In 2006, imports from China totaled $288 billion, about 16 percent of all U.S. imports and equal to only 2 percent of America's $13.2 trillion economic output (gross domestic product). Does that mean we don't have a trade problem with China? Not exactly.

China is already the world's third largest trading nation and seems destined to become the largest. On its present course, it threatens to wreck the entire post-World War II trading system. Constructed largely by the United States, that system has flourished because its benefits are widely shared. Since 1950, global trade has expanded by a factor of 25. By contrast, China's trade is mercantilist: it's designed to benefit China even if it harms its trading partners.

There's a huge gap in philosophy. By accident or design, China has embraced export-led economic growth. The centerpiece is a wildly undervalued exchange rate. Economist Morris Goldstein of the Peterson Institute thinks the renminbi is 40 percent cheaper than it should be. The resulting competitive advantage props up exports, production and jobs. Since 2001, China's surplus on its current account--the broadest measure of its trade flows--has jumped from $17 billion to $239 billion. As a share of GDP, it's zoomed from 1.3 percent to 9.1 percent. These figures include both Chinese firms and multinational companies doing business in China.

Despite popular impressions, China's trade offensive hasn't yet seriously harmed most other economies. For example, America's current account deficit (to which Chinese imports contribute) was $857 billion last year, up from $389 billion in 2001. Still, that hasn't stymied job creation; the U.S. unemployment rate is 4.5 percent. As for world economic growth, it's accelerated.

But what's been true in the past may not be true in the future. The huge U.S. trade deficits, fed by Americans' ravenous appetite for consumer goods and heavy borrowing against rising home values, stimulated economies elsewhere, including China's. Now that stimulus is fading, as U.S. home prices weaken and consumers grow more cautious. For China to expand production, demand must come from its own consumers, other nations--or some other country's production must be displaced. There's the rub.

Even Chinese officials favor higher local demand. But either they can't or won't stimulate it. Personal consumption spending is a meager 38 percent of GDP; that's half the U. …