Feldstein’s most historically significant idea is that America has only itself to blame for its huge trade deficits. Never mind that China and other East Asian nations pursue highly protectionist policies that cripple American exports and leave U.S. manufacturers at a profound disadvantage in global competition.
He is the leader of a highly influential “blame America first” clique among economics scholars that has proved decisive in shaping U.S. trade policy in the last forty years. Others who make similar arguments include Gregory Mankiw, Laurence Kotlikoff, Yukon Huang, Douglas Irwin, and Daniel Griswold.
Feldstein offered a good summary of the clique’s position in a recent article in the Financial Times. He contended that America’s huge bilateral trade deficits with China – the largest bilateral imbalances between any two nations in history – are nothing to do with Chinese policies. Rather they supposedly result entirely from U.S. domestic inadequacies, mainly a low U.S. savings rate.
Thus, in Feldstein’s view, China’s strenuous efforts since the early 1980s to boost its trade surpluses count for nothing. He mentioned in particular a policy of keeping its yuan massively undervalued. Supposedly Chinese leaders are just wasting their time.
China’s exports on the move: blame the U.S. savings rate. (Photo credit: Wikipedia)
There is another side to this story, however. While it is an accounting certainty that when a nation’s investment rate is higher than its savings rate, it will run a current account deficit, this is not the same thing as saying that a low savings rate causes a current account deficit. The fact is that causality can run either way. In other words, far from a low savings rate causing large current account deficits, the reality may be that large current account deficits cause a low savings rate.
And, pace Feldstein, this is what seems to be happening in the real world.
Certainly, as the Washington-based trade economist John Benedetto points out, East Asian governments, buoyed by their nations’ huge current account surpluses, have for more than a decade now been massive buyers of U.S. Treasury bonds. Writing in the Journal of International Commerce and Economics, he suggests that, in the eleven years ended 2012, foreign purchasers accounted for 43 percent of all U.S. Treasury security issues, and most of the purchases were made by foreign governments. Among these latter the Beijing government was probably the largest actor and as of 2012 its holdings probably totaled more than $2 trillion.
Although Benedetto does not say so, it seems clear that the trend has had a powerful effect in keeping U.S. interest rates low and thus in drastically reducing the incentive for American savers to save.
It is a fair guess that, if the East Asians had not invested so heavily in U.S. Treasury bonds, U.S. interest rates would have surpassed the levels they reached in the Carter years – shooting up perhaps beyond 20 percent. This in turn would have greatly increased the incentive for Americans to save (and probably more important greatly reduced the incentive to borrow). Thus the U.S. savings rate would have been powerfully boosted – again to levels not seen since the Carter years. A higher savings would therefore have reduced or even eliminated the current account deficits.
As Alan Tonelson of the United States Business and Industry Council has pointed out, by so aggressively buying U.S. government debt, China is the functional equivalent of a drug pusher pushing the U.S. to borrow more than is wise.
Why don’t we hear more of the anti-Feldstein side of the argument? Why indeed. The fact is that few policies in American history have been more heavily supported by lobbying money than America’s one-way opening to China. Many huge U.S. importers, most notably Walmart, benefit from forestalling any rise in the yuan’s dollar value.
Meanwhile many other U.S. corporations overtly or covertly promote China’s agenda in Washington as a way of currying favor with top leaders in Beijing. In former times, the most notable corporation in this regard was AIG (until it almost disappeared down the plug-hole during the Wall Street crash a few years ago).
Other corporations who generally promote Beijing’s agenda in Washington include Coca-Cola and McDonald’s. They do so as a quid pro quo for the fact that they enjoy perhaps the most privileged access of any American corporations in China. Unfortunately for the United States (if by no mistake, as far as the Beijing authorities are concerned), they do remarkably little exporting from the United States. Rather they create in China most of the added-value they sell there and thus are Beijing’s idea of perfect American corporations.
The result of its various trade policies is that China has boosted its exports from a mere $57 billion in 1988 to $2.21 trillion last year — an increase of more than 38-fold in a single generation. In the circumstances it is probably no surprise that the U.S. current account deficit has shot from $106 billion to $361 billion in the same period.
All this notwithstanding, Feldstein and his colleagues cling to the view that China’s trade policies are counterproductive. As for Chinese leaders, their view of American policies – and policy analysts – is unrecorded.