Why Krugman's China Argument Matters

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Why Krugman's China Argument Matters
Jesse Richman, 3/19/2010

Those who favor particular policy goals are fond of finding a nobel laureate in Economics willing to sign on to their particular policy perspective. In the totting up of endorsements, sometimes what gets lost is the crtical consideration -- does this nobel laureate specialize in knowing well the area that the endorsement involves. Paul Krugman has expressed his opinions on a wide range of policies, and on many political questions as well. In most areas his opinion should be taken about as seriously as that of any other good economist writing outside of his own area of expertise. But Krugman should be taken much more seriously on trade.

Paul Krugman's Nobel Prize in Economics is for his work on trade economics. Krugman's turn from (largely) defending American trade policy with China to advocating a 25 percent countervaling tariff to offset Chinese mercantilism should therefore be taken very very seriously. When the man who recently won the Nobel Prize for his work on trade says it is time to put a tariff in place... it is time. Past time.

There is a risk, however, that many of those who read Krugman's oped will fixate on currency value question. The currency value is part of a bigger issue: the forced flow of savings. Krugman clearly recognizes this. The fundamental issue is China's multi-faceted mercantilist strategy and its result: the trade deficit.