What About the Trade Imbalance, Indeed

Is China growing at the United States’ expense? That is one of the most vexing questions about China for U.S. politicians, and that’s the question Stephen Roach of Morgan Stanley and Desmond Lachman of the American Enterprise Institute are at work debating on cfr.org.

Short answer? Well, they’re not giving a short answer. In Roach’s opening argument, “Don’t Scapegoat China,” he argues that the United States needs to get its house in order before it can blame China. He says the culprit, by in large, is “a dearth of domestic saving” in the United States. “Lacking in domestic saving, the United States must import surplus saving from abroad in order to grow—and run massive current-account and foreign trade deficits to attract the capital,” Roach writes.

Lachman comes back with an indictment of China’s undervalued currency. The United States should save more, he agrees, but “it will also need a much cheaper dollar to promote its exports and to discourage its imports.” And China will have to let its currency reflect market value for that to happen. So in addition to better U.S. policy, Lachman says China will have to undergo currency reform for the good of everyone.

Roach counters that Lachman’s opinion reflects the Washington Consensus (which is more or less the idea of neoliberal reform), which he summarizes thus: “Sure, we in America need to fix our deficits—and maybe some day we will—but China needs to get its act together now.”

A small wrench landed in their civil debate today. Without specific reference to the currency issue, the Chinese Commerce Ministry has said it will attempt to eliminate China’s trade surplus in the next four years.

Until 2010, the world’s fourth-largest economy will target 10 percent annual growth in foreign trade, down from 24 percent growth in the first half of the decade, the commerce ministry said in a statement on its website Wednesday.

In the next four years, China will target a new foreign trade strategy where exporters abandon the blind pursuit of growth for growth’s own sake in favor of “quality growth,” the ministry said.

My question for those with a better understanding of economics is: How will this policy, if executed as advertised, affect the feasibility of revaluing the currency?

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