U.S. — China: The Drug Addict and the Dealer

In international diplomacy and children’s tales alike, sometimes the only good questions are asked by those who understand nothing.

Thus, a beginner in economics could ask a question about the current discord between the United States and China that economists would find silly. The Americans reproach the Chinese for selling their goods at too cheap a price — or for having an undervalued exchange rate. What offends them?

If I’m not mistaken, people who worry about their purchasing power are actually delighted by this situation. Why don’t political leaders thank the Chinese for this gift that should make their electoral mission easier?

A second-year student would find the explanation in the “predatory pricing” theory: If a firm sells its goods at too cheap a price, it can manage to drive its competitors out of the market and impose monopoly prices as a result.

For the time being, consumers have nothing to fear from low prices. But they must fear the monopoly prices that will come eventually; however, the analogy with exchange rates has its limits. A firm can be driven out of the market — not a whole country.

To claim that Americans are complaining about a currently undervalued exchange rate because they are afraid of an overvalued currency in the future is more psychoanalysis than economic analysis.

A third-year student with a passion for behavioral economics would find that the Sino-American dispute reminds him of a dispute between a drug addict and his or her dealer. The drug addict reproaches the other for selling his or her goods at too cheap a price, because he or she does not want to want to have it. His or her hypocrisy is obvious: Going to rehabilitation would require the drug addict to assume his or her responsibility for his or her condition.

Nevertheless, the dealer’s rising prices could strengthen his or her determination to live without drugs. Yet again, the analogy is not very plausible. Do the American people really suffer from such low prices? In the U.S., the average propensity to save was less than 1.5 percent of the national income in 2009. Without the contribution of trade, the investment rate would also have been that low, but it actually was 2.1 percent of the national revenue. Thank you, Chinese, for investing in the U.S. when Americans did not want to.

The real imbalance is elsewhere. The U.S. race for consumption does not prevent American factories from stagnation because demand is too low. The Chinese are accumulating U.S. treasury securities that will give them access to American goods in the future.

As Keynes already pointed in the 1930s, future demand does not mean production now. The correct American plea would be to thank the Chinese for their low-priced goods, while asking them to bring on the day when it is their turn to buy goods. Re-balancing exchange rates would then come as a result — not as a precondition to be reproachfully demanded.