Thursday, April 20, 2006

U.S.-China Economic Relations

China's president, Hu Jintao, is now visiting the United States, so many people are focused on economic relations between the two countries.

In an op-ed in today's Wall Street Journal, Stanford economist Ronald McKinnon addresses the topic. He says we should stop worrying about the exchange rate between the Chinese yuan and the U.S. dollar. (For previous posts on this topic, click here and here.) McKinnon then suggests that, instead, we should worry about saving rates in the two countries:

[P]ersistent trade surpluses in China and trade deficits in the U.S. reflect very high saving in China and unusually low saving the U.S....China needs to increase private consumption in order to reduce its saving glut....But the U.S. needs to drastically rein in the federal budget deficit in order to reduce the national saving deficiency.
The positive economics that links saving and the trade imbalances should be familiar to every student in ec 10. It follows from that important but often neglected accounting identity: NX = S-I.

The normative economics, however, is not obvious. I am sympathetic to the view that the United States should want to increase national saving, as I noted here. But the case for lower national saving in China is less clear, especially from an American perspective.

From a Chinese perspective, one can argue that China should save less and consume more in order to alleviate current poverty, even at the expense of future generations. But should Americans care if the Chinese save a lot? Sure, the likely outcome is that some of that Chinese saving will flow into the U.S. economy, financing investment here, which in turn means a U.S. trade deficit. But so what? If China saved less, interest rates would be higher around the world, including in the United States, and investment would be lower. How would that benefit us?

It may be easier to think about the issue in personal terms. If I am not saving enough for my retirement, that is a problem for me. If my neighbor is saving too much for his retirement, then he should think about taking a nicer vacation or buying a new car. But is it a problem for me if my neighbor saves too much? I don't think so.

So, if high saving in China is a problem, it is a Chinese problem, not an American problem.