What Can the Chinese Do To Our Economy? To Theirs?

Matt Yglesias asks what, exactly, China is going to do to our economy if the U.S. government steps up its criticisms of their various human rights violations or lack of cooperation on issues like Iran or Afghanistan. The correct answer is, he notes, that they can do very little. I wrote about this in the spring when Treasury Secretary Tim Geithner made his own voyage to China:

But outside of the political sideshow, the much-hyped Chinese ownership of U.S. debt and the controversy over exchange rates (which has led some Americans to accuse the Chinese of currency manipulation) isn't likely to change in the near future.

"The truth is … China really has no choice," Michael Pettis, a professor at the Guanghua School of Management in Beijing, says in an e-mail. "China does not want to hurt its export sector (on the contrary, it is trying to prop it up), and since no one else besides the United States can run such large trade deficits, China has no choice but to keep buying dollars."

What's more interesting about the fuss isn't what China could do to the U.S. economy, but what they're doing about their own -- the current Chinese economic policy greatly advantages coastal elites over rural interests, and economic inequality is a big issue. Pettis, whose blog, "China Financial Markets," is really a must-read on these issues, thinks the larger concern is that the Chinese won't heed international advice to about balancing global trade (now, China is saving/investing too much, and the U.S. is overconsuming) because that would require greater household income growth in China, which obviously involves redistribution of income and probably increasingly broad political awareness.

But the insistence of the Chinese government that exports and investment are the way out of the global recession means that China's recovery is weaker than many realize, and could lead to more trade disputes as the Chinese continue to pursue their pro-export policy at the expense of the rest of the world. Ironically, the rebalancing policy that the Obama administration supports -- which would lead to less reliance on U.S. consumption -- is more broadly in the interest of the Chinese people than what Chinese leaders want, which is maintaining the current status quo between the two economies.

-- Tim Fernholz