The U.S. Needs to Find Another Scapegoat

For Washington, the undervaluation of the yuan is the principal cause of trade deficits and unemployment. In view of the size of the deficit, and not only with China, the interest of the United States is in asking good questions and considering its level of savings. Acting only on relative prices is the best way for nothing to change.

Google, the renminbi, whatever the problem is, the United States knows who their culprit is: China. When readers wonder about the rise in unemployment or pressure on their salaries, the answer they are given is that it is because of the trade deficit. For Washington, there is not the slightest doubt: China, by undervaluing its currency, is directly responsible for 39 percent of the American trade gap in 2008–2009, and the only way for the United States to help American workers is to bang their fists on the table.

While this argument may seem acceptable, it rests on a poor economic foundation. In 2008–2009, the United States experienced a trade deficit with more than 90 countries. This is called a multilateral trade deficit. Washington, with the support of the most renowned economists in the country, persists in advocating for a bilateral solution and demands either a major revaluation of the renminbi or a large-scale taxation of Chinese imports. A bilateral solution to multilateral stagnation: That’s just as good as trying to bail out the Titanic with a teaspoon… Unless the problems that led to this deficit are tackled outright, the United States will do nothing but take the Chinese share of “responsibility” out on another country.

With such a trade deficit, it would be in the United States’ interest to ask itself the real question. Does the problem really come from China or rather from savings? In 2009, American net national savings barely reached 2.5 percent of gross national product, its lowest level ever recorded. To finance its future growth, the United States is thus condemned to counting on the savings surplus of foreign countries and to maintaining the massive deficit in its current account to attract foreign capital. This is a fact: Without savings, it is impossible to shrink a multilateral imbalance of trade.

True, China has a lot to do with the United States’ multilateral trade deficit, but only because American companies are looking elsewhere for profitability that the costs of production don’t allow them to attain at home. As for American consumers, they are turning more and more toward cheap Chinese products, the quality of which never stops getting better. Given their level of savings, the United States having China as the main trading partner is thus almost a godsend!

The fact remains that China is not irreproachable and that the considerable current account surplus, while a surplus, is no less an imbalance. Just as it is in its general interest for the United States to resolve its savings problem, the world has a right to expect China to resolve its own.

It is advisable to place these adjustments back in the context of multilateral imbalances. China is only one of the 90 countries with which the United States has a trade deficit, and Sino-American trade only represents 12 percent of China’s commercial trade. Every bilateral solution limited to these two countries would therefore be destined to failure.

That doesn’t prevent eminent economists from proclaiming loud and clear that a revaluation of the renminbi with the dollar would lead to the creation of more than a million jobs in the United States. They should know it better than anyone, however: Acting on relative prices is the best way for nothing to change. Rebalancing the pendulum of world savings is much more effective. Schematically, the United States must reduce its deficit and renew household savings, while China must take care of stimulating internal consumption. By hounding China, Washington could lead the rest of the world down a very slippery slope. This would not be the first time that, when faced with an economic problem, the political class prefers to cover its eyes. The trade frictions and protectionist measures that could grow out of this error of judgment would plunge us into a situation that is much more worrying than the crisis of 2008–2009.