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Japan is Back
Jesse Richman, 9/29/2010

The failure of the United States to confront Chinese mercantilism leaves China's competitors with little choice but to follow suit or see their corporations' competitiveness suffer in the face of Chinese competition.  A hard hitting commentary by ANATOLE KALETSKY in the New York Times offers an intriguing analysis.  Kaletsky chronicles the decision by Japan to begin major interventions in foreign exchange markets in order to drive down the value of the Yen so as to protect the competition position of Japanese companies.

"The decision to break with free-market ideology and spend government money to control the yen’s value against the dollar was mainly driven by Japan’s relationship with China, not America. Japanese companies including Sony and Toyota that had demanded government action devaluing the yen were not concerned primarily with their competitiveness against America rivals. The motivation was a fear of being undercut by exporters in China, Korea, Singapore and Taiwan — all countries that aggressively manage their exchange rates."

The US model of free market economics is, Kaletsky argues debunked.  

"The fact is that the rules of global capitalism have changed irrevocably since Lehman Brothers collapsed two years ago — and if the United States refuses to accept this, it will find its global leadership slipping away. The near collapse of the financial system was an “Emperor’s New Clothes” moment of revelation."

China's growing power seems to demonstrate that mercantilism applied against a pacifist target can succeed in spades.  

The title "Blaming China Won’t Help the Economy," is intended to highlight the fact that mercantilism is not merely a Chinese phenomenon, and simply complaining about China will not address the U.S. economic challenges.  The managing of trade and trade balances is, Kaletsky argues, likely to be an ongoing feature of international economics from now on.  The title would be more accurate, however, if it was "Simply Blaming China Won't Help the Economy."  We need to move from simply blaming China to developing an effective strategy to maintain relatively balanced trade and encourage economic growth. 

Kaletsky is short of specifics about how the United States should adapt its approach to the world in order to avoid having the "newly dominant economic model ... be an authoritarian state-led capitalism inspired by Asian values."  Two points seem to emerge from the analysis however.  One is that the United States needs to shift from taxing income to taxing consumption.  The other is that the United States needs to get serious about balancing trade.   

Kaletsky is right that simply blaming China will not help the economy.  However, moving to end the trade imbalances with the US on which the authoritarian state-led capitalism of Asia seems to depend (and that does involve placing a goodly share of blame on China) would make a great deal of sense.   Strategic trade and mercantilism of the Asian variety would not work so well if the target responded effectively.  Our pacifist attitude has enabled and emboldened those who would replace "democratic capitalism, based on Western values and American leadership."  America would do well to forge a new national consensus for balanced trade and long term growth.  Kaletsky's warnings from Hong Kong should be heeded.    

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