Economic reality is invariantly much more complex than many nice but mostly partial economic theories and models based on certain assumptions and focus on certain aspects of the reality.

The main issues are largely empirical in nature.

The US has tended to run trade deficits for fairly long period of time, with different countries on the other side of the balance from time to time and as its target of trade wars.

The question is not just China with its currency pegged to the $US has trade surplus with the US, but also some other countries whose currencies are free to adjust that also have trade surpluses with the US.

While the US can blame China for fixed exchange rate, how should it blame those other countries?

Besides, bilateral trade balance is not and should not be the benchmark for trade balance in a multi-country trade in the world as it is. To require bilateral trade balance will mean huge losses in global welfare due to losses in trade opportunities.

Further, optimal trade balance even for a country should be over a sufficiently long period and should not mean balance year by year.

But trade is economic as well as political, so people from short term political point of view often selectively quote or use some partial economic theories to their advance their arguments. Even economists sometimes can act either inadvertently or deliberately in that way.

Paul Krugman, a fairly recent Nobel Economics laureate, is an example in this regard.

Of course, he is famous for strategic trade theories, after all.

If there was a concerted effort at ‘protectionism’, then Schumer’s legislation would have been passed – it didn’t and was no doubt pulled because it didn’t have sufficient support. Moreover, where has the recent letter by 100 or so Congressmen gone? Geithner has fudged the decision of ‘currency manipulation’.

In addition, ‘protectionism’ is portrayed as something of a pejorative in this piece. I appreciate that economists in the main like to cite the mantra that trade is good and increases all countries GDP and that protectionism is bad, with oft-cited example of the inter-war years but such mantras often obscure the details of who actually benefits from these situations. This is not to say that I am defending ‘protectionism’ but rather that the author was more explicit in his own ideological bias. Indeed, this is the principal problem with the article – I enjoyed the detailed analysis and it puts forward a strong case for this particular course of action but it would be better served if it acknowledged its own bias. Rather, it hides behind the camouflage of “economics” but that’s a falsehood – all economics is inherently political because it involves making choices. The course of action in this article is presented as the best – but leaves out precisely who it is best for?

This then comes back to the references to protectionism – US politicians aren’t motivated by taking the best course of action for the global economy – economics may be global in nature but politics is still local. Their electorates are not in China. Hence, they are motivated by taking decisions that are seen to lessen the pain of US workers. Indeed, this whole aspect of the currency debate is curiously absent from this article. Curious because I would argue that the inter-related issues of workers’ wages, job losses and US companies’ outsourcing are really driving the debate on China’s currency in the US.

Moreover, in contrast to the characterisation of the economic logic presented here, I don’t know if people are solely focusing on the elasticities of trade. The article assumes that appreciating the currency will not affect savings rate and investment spending side of the equation. Maybe. But I have seen other economists argue that, by appreciating the currency, the cost of Chinese exports will increase and, if you accept the argument that cheap Chinese goods has contributed to increased consumption, then a rise in the value of these goods could increase the savings rate and so more balanced trade could be achieved this way.

Personally, I don’t think it is clear that this would happen (capital could just relocate to other sites to negate the increased costs) and, if even it did, it may not offset the increase in investment. I just find it strange that such a scenario was omitted from the article while the increase in investment was outlined. It all just creates a sense of perpetuating a particular viewpoint without being explicit about where it is coming from.

Thank you for this concise analysis.

I have always agreed with the headline of this piece.
I can now explain the reasoning to students in a rather more sophisticated way.

Best wishes,

Andrew Elek