Blaming China Will Not Solve
Stephen S. Roach
America’s Problem
America’s fixation on the “China problem”
is now boiling over. From Google to the
renminbi, China is being blamed for all that
ails the United States. Unfortunately, this
reflects a potentially lethal combination of
political scapegoatting and bad economics that
could well end in tears.
The political pressures are grounded in the angst of
American workers. After over a decade of relatively stagnant
real compensation and, more recently, a historically sharp
upsurge in unemployment, US labor is being squeezed
as never before. Understandably, voters want answers.
It is all because of the trade deficit, they are told—a visible
manifestation of a major loss of production and employment
to foreign competition. With China and its so-called
manipulated currency having accounted for fully 39% of
the US merchandise trade deficit in 2008-09, Washington
maintains that American workers can only benefit if it gets
tough with Beijing.
However appealing this argument may seem on the surface,
it is premised on bad economics. In 2008-09, the United
States had trade deficits with over 90 countries. That means
it has a multilateral trade deficit. Yet aided and abetted by
some of America’s most renowned economists, Washington
now advocates a bilateral fix—either a sharp revaluation of
the renminbi or broad-based tariffs on Chinese imports.
A bilateral remedy for a multilateral problem is like
rearranging the deck chairs on the Titanic. Unless the
problems that have given rise to the multilateral trade deficit
are addressed, bilateral intervention would simply shift the
Chinese portion of America’s international imbalance to
someone else. That “someone” would most likely be a higher
cost producer—in effect, squeezing the purchasing power
Note: An edited version of this essay appeared as an Editorial Comment in the Financial Times on March 30, 2010.
March 30, 2010
Chairman, Morgan Stanley Asia
of hard-pressed US consumers. Ironically, Washington’s
penchant for the bilateral fix to a multilateral problem risks
turning the tables on American workers at just the time when
they are struggling to get back on their feet in this feeble post-
crisis recovery.
As opposed to counter-productive China bashing, the United
States would be far better served if it took a deep look in the
mirror and faced up to why it is confronted with a massive
multilateral trade deficit. America’s core economic problem is
saving—not China.
Washington’s insistence on a large revaluation
of the renminbi, or the imposition of tariffs on
Chinese imports, reflects a lethal combination of
political scapegoatting and bad economics.
In 2009, the broadest measure of domestic US saving—
the net national saving rate—fell to a record low of a
negative -2.5% of national income. This is the sum total
of depreciation-adjusted saving by households, businesses,
and the government sector. Depreciation is removed to get
a sense of how much saving is left—after providing for the
normal obsolescence of antiquated or worn-out capacity
—for the expansion of capital stock. In the case of the
United States, there isn’t any. That means America must
import surplus saving from abroad to fund the sustenance of
its future growth.
This is where China enters the equation. In order to attract
the foreign capital that America needs to sustain its growth,
the US must then run a large current account deficit. In the
case of the US, the cross-border multilateral trade deficit in
goods and services has accounted for an average of 95% of the
total current account deficit over the past five years. In other
words, for a saving-short US economy, there is literally no
escaping large multilateral trade imbalances.
Yes, China is the biggest piece of America’s multilateral trade
deficit. But that is because high-cost US companies are
increasingly turning to China as a low-cost offshore efficiency
solution. And it also reflects the preferences of US consumers
for low cost and increasingly high quality goods made in
China. In other words, saving-short America is actually quite
fortunate to have China as a major trading partner.
Due to a record shortfall of domestic saving,
America must import surplus saving from
abroad—and run massive current account and
multilateral trade deficits to attract the capital.
Currency, or relative price, adjustments between two
countries are not a panacea for structural imbalances in the
global economy. What is needed, instead, is a shift in the mix
of global saving. Specifically, America needs deficit reduction
and an increase in personal saving, while China needs to
stimulate internal private consumption.
Washington’s scapegoatting of China could take the world
to the brink of a very slippery slope. It wouldn’t be the first
time that political denial was premised on bad economics.
But the consequences of such a blunder—trade frictions and
protectionism—could make the Crisis of 2008-09 look like
child’s play.
Stephen S. Roach is Chairman of Morgan Stanley Asia and
author of The Next Asia (Wiley 2009).

No, China is hardly perfect. Like the United States, it, too,
has a large imbalance with the rest of the world—namely, an
outsize current account surplus. And just as responsible global
citizenship requires America to address the saving deficiency
that lies at the heart its international imbalances, the world
has every reason to expect the same from China in reducing
its surplus saving. Those adjustments must be the essence of
any successful global rebalancing agenda.

But these adjustments must also be framed in the multi-

lateral context in which the imbalances exist. Just as China is
one of over 90 countries that America runs trade deficits with,
US-China trade now represents only 12% of total Chinese
trade with the rest of the world. It is wrong to fixate on the
relative price between these two nations—specifically, the
foreign exchange rate between the US dollar and the Chinese
renminbi—as the solution for the deeply rooted saving
disparities that drive these multilateral imbalances.

A bilateral solution for a multilateral problem is

like rearranging the deck chairs on the Titanic.

Yet some of America’s most prominent economists are saying

the opposite—claiming that a revaluation of the renminbi
vis-à-vis the dollar would not only create over one million
jobs in the US but that it would inject new vigor into an
otherwise anemic global recovery. Economists should know
better. Changes in relative prices are the ultimate zero-sum
game—they re-slice the pie rather than expand or shrink it.
When nations have imbalances with a large cross-section of
their trading partners—as is the case with both China and the
United States—there can be no bilateral solution.

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