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November 11, 2009

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Stiglitz: High price for US protectionism

BOTH countries (China and the United States) have benefited very greatly from their trade relationship.

China's growth has been based on exports. China has achieved the most rapid economic growth of any country over a long period of time, and has used the benefits of that to reduce poverty.

The US has benefited because our consumers have had access to low-priced goods. And that enables them to have higher standards of living, especially with wages not doing very well.

On the other hand, the changing global comparative advantage means that there's been a large shift of production from Western countries to China in the areas of manufacturing, and that necessitates restructuring of the economy in the US and other Western countries.

And restructuring is always difficult. People lose their jobs, they may get new jobs, but the new jobs often don't pay as well as the old jobs. And when you go into an economic recession, those concerns about jobs and wages become even greater. So right now, one out of six Americans cannot find a full time job.

That's a very serious problem. And they always look to blame someone else.

The blame of course was that the US did not manage its economic policy very well, it created a bubble, the bubble broke, and we are suffering from the consequences.

Inevitably, people always look to blame others. It's human nature. So one of the issues is are we losing jobs because of China?

There are many factors contributing to global imbalances. The fact is, for instance, that the US has, for a very long time, been living beyond its means.

Normal economics would say that rich countries should be lending. And normal economics would say that a country with an aging population, like the US, should be saving to prepare for retirement of the workers.

We've done just the opposite. That is the most important source of global imbalances.

If you look at the list of countries with trade surpluses, the US trade deficit is essentially equal to the value of trade surpluses of all the countries of the rest of the world.

It's not just China and the US. It's the US trade deficit and the surpluses of many countries. The adjustment of the exchange rates is likely not to affect very much the US trade deficit and therefore the global imbalances.

But it would affect whether the US buys some goods from China or Sri Lanka or Bangladesh. So there are issues about how different countries are affected.




 

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