The FT's Martin Wolf managed to find some encouragement
in the final communiqué from the Seoul G-20 meeting. In a column earlier this week,
he said that language describing the use of various measures of global imbalances and suggesting the need for action to rebalance chronic current account surpluses and
deficits suggested that, under the radar, the U.S. and China are moving toward consensus on a way out of the apparent impasse reached in Seoul.
I told him that I marvel at his optimism. But let's
say, for the sake of argument, that he's right and that the U.S. will move toward
trying to produce more of what it consumes and exporting more of what it
produces while China does the opposite. I think there remains the major question
of whether either side can actually, physically do what is necessary to achieve
This question occurred to me last night after a chat
with a friend from FedEx who mentioned that while his planes fly fully loaded from Asia to America, they
return to Asia almost empty. Well, of course, that makes a lot of sense because
we don't make much here in the United States that FedEx can take back. Of course, we do
export to China, but in recent years our biggest or second biggest China
bound export items have been waste paper and scrap metal, and those items go by
ship. In the high-value, low-volume, high-tech category of goods that fly
well, the United States, despite its self-image as the world's high tech leader, has a trade deficit that will likely exceed $150 billion this year.
Let's take a few major products to see how things
might work. Steel, for example, is a key product for any industrial economy.
The United States imports about 30 percent of the steel it uses while China has
more steel making capacity than the rest of the world combined. So,
in a rebalancing scenario, Washington would try to find ways to
encourage U.S. companies to buy more of their steel from American producers.
But the government would run into the problem that there may not be enough
actual production capacity left in the United States to allow a substantial
reduction in imports.
Of course, more production capacity can be built, but not
in any short period of time. Construction of a new steel mill, even if anyone
would have the courage to build one in the United States knowing that China's
producers could at any moment unleash a flood of cheap exports into the
market, would take one to two years.
At the same time, China already produces
virtually all of the steel it uses and has enough production capacity to
fulfill domestic demand many times over for a long time to come, even without
increasing production capacity. So China's steel industry really can't
rebalance. It can't sell a lot more than it already does at home, and if for
some reason it stopped its overseas shipments it would be left with massive
excess production capacity that could easily bankrupt its companies.
As another example, take the Apple iPad. Apple
is an American based company to be sure, but virtually nothing in the iPad is
made in America. Of course, the product is conceived, designed, marketed, and
sold in the United States, but the components are mostly made in Japan, South Korea, Taiwan, and
Singapore, and the assembly takes place in China. So rebalancing implies that
maybe some iPad production would be switched to America.
principle, there is no reason why the semiconductor chips, displays, and other
key components of the iPad couldn't be made competitively in the United States
and inexpensive assembly could, perhaps, be done in Mexico or elsewhere in
Latin America. But that would mean that the major factories and investments
that have been made in iPad production in Asia would have to be at least partly abandoned. That would result huge financial and job losses to which Asian governments would object.
I sometimes wonder if economists consider these
structural, nuts and bolts issues when they talk blithely of rebalancing. These are not things that can be turned on and off like a spigot. It takes a
couple of years to build a new semiconductor plant and costs $5-8 billion. Once
that investment is made, it is not quickly abandoned unless there is some major
change in circumstances.
In his column, Wolf insisted that the U.S. and China
must achieve rebalancing fairly quickly in order to avoid protectionism. But is
it possible that the action actually runs in the opposite direction -- that some
degree of protection might be necessary in order to create the change in
circumstances necessary to achieve big shifts in the location of production and
thereby also achieve the holy grail of rebalancing?
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
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