Professor Robert MacCulloch: China, Throw Down your Wall.....

China, Throw Down your Wall. Give Freedom to your people. Doing So Will Eliminate America's Trade Deficit with Your Nation and End the Tariffs.

Its easy to believe there's a world-wide Big Media frenzied conspiracy against the US, which our increasingly hysterical PM has jumped on, because its looking that way. We know why New Zealand PM Luxon is talking with the Queen of World Protectionism, The European Union's Ursula von der Leyen, and with the Big Army Boss who ended democracy in Fiji, its current PM Sitiveni Rabuka, about their freedom and free trade convictions. Its because Luxon's marketing brain is telling him, "Shift the narrative away from Treaty of Waitangi", which he has washed his hands of.

Seems its easier for Luxon to save the World's Trading System from itself than solve debates around a one page document on our small island. Luxon is loving his tourist travels to Japan, India & more. Being PM is a great way to see the world. The fact he's taken sides against the US will not go unnoticed in Washington, as Foreign Minister Peters well knows. On the technical issue of how world trade works, Peters rightly characterizes it as a hard subject, "without black or white answers". So how have the deepest thinkers explained America's enormous trade deficit with China? Certainly not as a lovely mutually-beneficial voluntary free market exchange of goods, services and capital, which is how it is being characterized in todays Big Press. Certainly not as an exchange that has unambiguously benefitted both those parties, as the media is trying to now pretend.

The best explanation that has a hugely impressive pedigree of contributors in international economics goes as follows. Its a fact that wages in China have long been suppressed. They are not determined by market forces. A vast number of Chinese work for firms directly, or indirectly, owned by their government. By keeping wages artificially low, those government controlled Chinese firms have made artificially high profits which have in turn been invested and, for the most part, saved overseas. There have been other mechanisms of State Control which have led to China's exceptionally high level of forced national savings, like a very low social safety net and mandatory housing savings scheme. It is these forced savings which have created the huge capital outflows from China and into the United States. It is those outflows that have artificially lowered the Chinese exchange rate with the US dollar. It is that low exchange rate that has made Chinese goods artificially cheap to Americans and funded an overly consumerist society. It is those forced Chinese savings that have poured into the purchase of US financial assets. In other words, it is the lack of freedom in China that is the fundamental reason behind America's huge trade deficit with China. A billion Chinese have been forced into consuming less overseas goods than they would have liked, since they lack the freedoms to make their lives better. American industries have been wiped out due to the unfair competition China's policy of forced low consumption & high savings has created.

Do these writings come from some made-up narrative of this Blog; from some half-baked economics I'm peddling? No. I am simply outlining the argument made by my old coauthor, the former Head of the Harvard Economics Department, Alberto Alesina, who was one of the world's greatest economists and is no longer with us, and Luigi Zingales at the pro-market University of Chicago Business School. A summary of their article, called Tear Down This Chinese Wall, can be found at the underlined link. They write (a video is here), "The Chinese wall is metaphorical, but equally hideous [to the Berlin Wall]. If there weren't enough moral & humanitarian reasons to make that exhortation, here's an economic one: Lack of freedom in China is the main cause of imbalances in the world. Its well-known the Chinese trade surplus is the counterpart of too much saving. How can we deem Chinese savings excessive? In a free country, the consumption-saving decision is the result of individual choices, which reflect the preferences of its citizens, and it would be paternalistic of us to argue that savings are excessive. The point, though, is that China isn't a free country & the economic decisions of Chinese aren't driven by market forces. They're influenced by political decisions made by a small self-appointed elite. This group has decided the accumulation of claims on the rest of the world is more important than the standard of living of the current generation. The excess savings don't reflect the will of the Chinese people".

Before New Zealand Prime Minister Luxon starts attacking the United States and joining forces against it with other countries in the name of free and fair trade - and launching a campaign against the US tariffs - maybe he should ask his Foreign Minister for advice, do some economics, and read about the truth behind the economic imbalances in the world today - namely lack of freedom in China. PM Luxon should take the Alesina and Zingales advice which is to, "regain the high ground and lecture [China] on what's best in America: freedom. Accusing communist China of keeping workers' salaries artificially low and not being pro-workers would embarrass the nation's government. Learning from Reagan, we can stand on our beliefs. If we do, the Chinese wall will come down sooner than we expect". Why isn't PM Luxon lecturing China about how it is not a free country? Here is the answer: because he finds it easier to bash Trump. When it comes to China, the New Zealand Prime Minister is scared of saying anything that may rattle the dragon. In other words, he's a wimp.

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.