“We are truly going to rise or fall together.” That was Hillary Clinton yesterday before departing Beijing, the last stop on her four-nation trip.  The secretary of state, repeating accepted wisdom, was referring to the American and Chinese economies.

Okay, Mrs. Clinton, time for an elementary lesson in economics.  It’s true our economies share an “interconnection” as you put it, but that does not mean we will share the same fate.  On the contrary, our economies are bound to move in opposite directions in the months ahead.

China earns large current account surpluses, and we run large deficits.  The current global downturn will, not surprisingly, treat us differently.  In the Great Depression, perhaps the closest analogy to what we are seeing today, the surplus countries had the hardest time adjusting.  Why?  Because they could not continue to sell their products to a slumping world.  And this pattern is repeating itself: even in the initial stages of the current crisis, the Chinese economy is manifesting severe problems.  January, for example, was the third consecutive month China’s exports fell.  Export falls are especially worrisome for Beijing because an extraordinarily high 38 percent of its gross domestic product is derived from sales of products abroad.  China, unfortunately for the Chinese, has an economic model particularly ill-suited to the current economic environment of plunging growth and trade.

The United States, unlike China, has the means to solve its own problems.  American consumers are cutting way back, which means our trade deficit is falling as imports decline.  As a consequence, our savings rate is increasing.  We may not be able to fund all our government’s need for cash at this moment, but we are moving in that direction.  And unlike China, we would do relatively well if the global economy fell apart.

I’m not arguing we should reject international commerce or adopt protectionist measures — in fact, I believe the opposite — but we do need to correctly understand our situation today.  So, Madame Secretary, we will not rise or fall together with China.  Quite the opposite, in fact.

del.icio.us

Google

Facebook

This entry was posted on Monday, February 23rd, 2009 at 9:49 AM and is filed under Contentions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.