China it seems has made it to number two in the world economic rankings according to the latest figures from Japan and China.
In the United States, meanwhile, there is continuing criticism of the Chinese exchange rate policy with Nobel prize winner Paul Krugman going so far this morning as to suggest that an old fashioned trade war might be no bad thing.
Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies — because that’s what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject. But leave aside the fine print of the law for a moment: what China is doing amounts to a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions.
Yet the Chinese have taken our measure, and decided that we won’t act. Until or unless that changes, we’re just whistling in the wind.
I say confront the issue head on — and if it leads to trade conflict, bear in mind that in a depressed world economy, surplus countries have a lot to lose from such a conflict, while deficit countries may well end up gaining. Or to put it differently, right now we’re in a world in which mercantilism works. In the long run we’ll emerge from this kind of world; but in the long run …