Unforeseen Contingencies

A good friend of mine just sent an internet chain letter he received, and requested I comment on it. Does it make sense, and could it work? Typically I have no time for these sorts of things, but this one raised a number of interesting issues. The chain letter:

"Do you want to send a message to China?

Are we Americans as dumb as we appear or is it we just do not think? While the Chinese, knowingly and intentionally, export inferior products and dangerous toys and goods to be sold in American markets, the media wrings its hands and criticizes the Bush Administration for perceived errors. Yet 70% of Americans believe that the trading privileges afforded to the Chinese should be suspended. Well, duh..why do you need the government to suspend trading privileges? DO IT YOURSELF!

Simply look on the bottom of every product you buy, and if it says 'Made in China' or 'PRC' (and that now includes Hong Kong), simply choose another product or none at all. You will be amazed at how dependent you are on Chinese products, however you will be equally amazed at what you can do without. Who needs plastic eggs to celebrate Easter? If you must have eggs, use real ones and benefit some American farmer. Easter is just an example, the point is. do not wait for the government to act. Just go ahead and assume control on your own.

If 200 million Americans refuse to buy just $20 each of Chinese goods, that's a billion dollar trade imbalance resolved in our favor...fast!! The downside? Some American businesses will feel a temporary pinch from having foreign stockpiles of inventory.

The solution?

Let's give them fair warning and send our own message. We will not implement this UNTIL June 4, and we will only continue it until July 4. That is only one month of trading losses, but it will hit the Chinese for 1/12th of the total, or 8%, of their American exports. Then they will at least have to ask themselves if the benefits of their arrogance and lawlessness were worth it.

Remember, June 4 to July 4.

Send this to everybody you know.

Show them we are Americans and NOBODY can take us for granted. If we cannot live without cheap Chinese goods for one month out of our lives, WE DESERVE WHAT WE GET!

Pass it on America!"

Well, what do I make of this? Three sets of points seem relevant.

First of all, unlike most email schemes, if this one were actually to come to fruition and led to a boycott, it would have some sort of noticeable effect. Never mind that anonymous email chain letters are a very unlikely way of organizing a successful boycott. Never mind that the numbers quoted are all wrong (200 million X $20 ea. = $4 billion, this is much less than American monthly imports from China, and since imports aren’t evenly distributed throughout the year, exactly 1/12 of annual imports rarely if ever occur in a single month). Regardless, a successful boycott would have effects of some sort. But there’s a great deal that is fundamentally confused about this approach to dealing with America’s "China problem."

Second, blaming China for knowingly exporting bad quality stuff isn't quite right; the Chinese government has been cracking down on and even executing officials, including the head of China's FDA, for producing and selling defective goods. China's problem is corruption rather than official policy, and it kills many more Chinese than it does foreigners. The results for the Chinese themselves are often terribly tragic, as when a family’s one child is poisoned by bad medicine. The Chinese are probably more familiar and far angrier about this problem (inferior goods) than Americans are, and the national government is worried about domestic harm as well as the damage it could do to China's exports.

And frankly, most Chinese goods are perfectly serviceable. It’s an exaggeration to suggest all Chinese goods are junk; for some classes of goods, Chinese products are among the best (e.g. athletic shoes, certain medical equipment, some electronics). Perhaps consumers still might prefer rejecting Chinese goods, but it would require an intentional boycott, because most Chinese goods deliver sufficient quality for the price; that’s why people buy them.

Third, the idea of boycotting China is somewhat interesting to me, not because I think it is a good idea, but because I wonder if the average American realizes what it would mean. If we completely boycotted China, we’d also be effectively cutting the other side of the balance of payments. China is actually accelerating its acquisitions of U.S. debt and dollar-denominated assets, while much of the rest of the world seems to be slowly cutting back. This means that (1) China is propping up the value of the U.S. dollar, and (2) China is doing the lion's share of work in financing our federal deficits.

Point (1) means that without China, the U.S. the dollar would drop faster than it currently is. Among other things, since petroleum is priced in dollars, this would mean we'd see even higher oil prices than we do. Everyone wants that, right?

An implication of point (2) is that without Chinese loans, our federal government borrowing would crowd out much more private borrowing than it currently does, driving interest rates up. Since a very large percentage of Americans themselves use credit to pay for daily consumption, this would mean belt-tightening and financial difficulties for many Americans. The Fed could push interest rates back down to combat this (as Fed Chairman Bernanke is doing now) but this would further worsen inflation and the weakening of the dollar against other currencies. Or maybe we could cut government spending, or raise taxes, or both. Most Americans seem to find all of these alternatives unacceptable, so their opposition to trade with China seems a little misplaced.

In fact, it is a somewhat dangerous situation, for both the U.S. and China. China faces increasing currency risk. They (mostly People's Bank of China) hold a bit more than $1.5 trillion in dollar assets, and at current rates of acquisition it might be closer to $2.5 trillion by the end of the year. A 10% drop in the dollar means losses of $150-250 billion. These would be big losses for the U.S., never mind a third world economy. This is not in the interest of either China or the U.S. The irony is that the dollar has dropped as a result of our subprime fiasco, and since China has simultaneously accelerated its purchases of dollar assets, it's poor Chinese citizens who are ultimately helping finance things like the Bear-Stearns bailout!

A gradual winding down of this tangled mess would be a good idea: the U.S. needs to get its spending under control, the Chinese need to better control their finances as well. China has built an economy that is overly dependent on foreign markets, at a cost to domestic consumption. They are lending elsewhere as well, not just the U.S. This seems to have begun as a way to suppress appreciation of their currency, to help foster exports, and now, in my view, is an attempt to keep the house of cards standing. China needs to build its domestic economy, so as to reduce its dependency on foreign markets (China is quite vulnerable if there's a bad U.S. and European recession), and to increase living standards for the average Chinese.

Similarly, if Americans were to bite the bullet and say "OK, let's stop living on credit" it would be a very good thing, quite painful in the short run, but beneficial in the long run. The "boycott China" approach effectively entails this, albeit without conscious intent. Of course, Americans could return to fiscal and monetary responsibility without a China boycott. Inexpensive goods from China aren't a bad thing, and most goods aren't substandard. It's not that trade, credit, borrowing, and the like are inherently bad...obviously they aren't. It's fiscal and monetary irresponsibility that are the fundamental problems, in both countries, and that lead to unsustainable trade and credit scenarios. Sound money and fiscal responsibility would be a nice start.

To the average American, this analysis would likely seem completely unfamiliar: no discussion of outsourcing or alleged job loss, no discussion of "China outcompeting us," nor any other mercantilist nonsense. Serious analysis reveals that the U.S. and China actually have common interests, and are caught together in a financial tangle that threatens both. It would be much easier for both countries to extricate themselves with some sort of coordinated effort, but it is so much easier for demagogues in each country to scapegoat the other country, and populations in both countries love to hear that their problems are really caused by nasty foreigners. Phony patriotism trumps reason every time, unfortunately.

Boycott China? Balancing our budgets would be a much better move.