Krugman - Is China the new Japan?

Reading Krugman, it was interesting (if perhaps only because of my historical ignorance) to see how much he emphasized Japan as the major perceived economic threat at the time. Now, of course, if one goes by what was said in the presidential debates on Monday, China is the major economic “threat” to the US, in addition to perhaps Brazil, India, Russia, and other better off, large developing countries. Just noticing this difference was interesting because it suggests that perhaps global “competitors” can change fairly quickly (over the course of a few years to a decade).

I also can’t help but wonder if there might be other aspects of China’s economic performance that might make the situation now different than the situation with Japan earlier. For one, it seems that China, unlike Japan, has many protectionist policies (rather than the de facto cultural protectionism Krugman describes), such as pegging its currency, discriminatory industrial policies that favor domestic firms, discriminatory health and safety rules on imports, and so on [1]. China also has failed to effectively enforce intellectual property rights [1].

Of course, as Blinder and others have pointed out, even if there are barriers to free trade, we are often still better off trading freely ourselves, but as Krugman asserts “free trade becomes very difficult to sustain politically if there is a widespread and growing perception that one of the main players is following different rules” (Krugman, 133). This describes almost perfectly the sort of public attitudes towards China that Romney and Obama were attempting to address and navigate around on Monday night. Though Krugman notes that for Japan, because the closed nature of its markets arises from decentralized cultural forces, threatening protectionism won’t work, he seems to have little concern about the issue. The Japanese advantage, he says, hurts our economy only marginally, and suggests that the “Japan problem” might “simply fade away” on its own (Krugman 152).

I am not sure if we could as easily apply this answer to China, however. Certainly, many are concerned by the fact that China’s GDP (purchasing power parity) is rapidly catching up to the US’s ($11.4 trillion versus $15.3 trillion)[2]. I do not doubt that if China surpasses our GDP that will have some economic impact on US-China trade, though (again as Krugman predicts) it might be minimal. However, it seems to me that China’s political position is far more formidable. With a centralized government, China would reasonably be more effective in enforcing anti-market and anti-free trade regulations than we are, and thus once more threats of protectionism from our slow-acting democracy would prove impotent. Yet there also seems to be another significant difference between China and Japan, being that China is a very strong military power with nuclear weapons. As such, China has considerably more leeway than Japan in using their political power to, say, collect on loans or snub the international community.

It seems to me that this combination of political power and economic power is what most concerns and frightens the American public. But I really wonder how much it matters that China is second (third if you count the EU as a whole) in GDP, or that this economic power is combined with a very centralized, powerful state with significant military (and nuclear) power. Krugman’s discussion of how exports and imports take up a relatively small fraction of the US economy (and thus our productivity is the most important determinant of economic growth) seems to suggest that there are limits to how much China can impact our economy, even if they take a very extreme path (which, given the current state of international affairs seems fairly unlikely). Though obviously more information and data is needed, it seems that (if Krugman’s analysis is right) China would be far more of a political threat than an economic one.

[1] Morrison, W. M. (2011). China-U.S. trade issues. Washington, DC: Congressional Research Service. http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1867&context=key_workplace

[2] https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html?countryName=United%20States&countryCode=us&regionCode=noa&rank=2#us