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  • China No Help In Recession

    China announced last Friday that its economy grew 8.7% last year. Among other things, this will prompt a chorus of claims that China is leading the world out of recession.

    Wrong.

    The typical way of thinking about this is to take China’s and every other country’s GDP growth, add it all up, and see which economy contributed most to the world’s pile. But that is not the way GDP works.

    Consider the case of a country that successfully dictates trade terms such that it extracts a great deal of wealth from its partners. Its GDP would grow very quickly while that of its partners would shrink or grow much more slowly. It would then seem that the predator is leading global growth higher, when it is enriching itself at the rest of the world’s expense.

    Behind this possibility is that GDP includes trade. A trade surplus adds to GDP and a trade deficit takes away. China runs the largest trade surplus, which means the rest of the world runs a large trade deficit with the PRC.

    Seen that way, China is not adding anything to global growth. Using trade, it is adding the most to its own GDP and taking away the most from the rest of the globe’s.

    It need not be so. China could encourage the development of its domestic economy, as it has long been urged to do for its own sake and that of its own people. This would increase demand for goods produced in the rest of the world. Then, and only then, China might actually be an engine for the world economy.

    The distinction is between performance and welfare. China is outperforming the world but it is not contributing to global GDP, just the opposite. Some of its gains are intrinsic to offsetting GDP losses for the rest of the world.

    Beyond GDP, the PRC has contributed a great deal to the world economy, especially earlier in the decade. Competition is the life-blood of long-term growth, however it is measured, and competition from Chinese goods is arguably the biggest contributor over the past decade to competition in the global economy. In terms of policy, Chinese production kept consumer prices down worldwide, helping to keep inflation low despite high levels of government stimulus around the world.

    The financial crisis has changed this, unfortunately. Previously, Chinese supply was helping meeting strong global demand. Now, Chinese supply is threatening to overwhelm weak global demand. Rather than leading, China is using the world to boost itself higher.

    Posted in International [slideshow_deploy]

    12 Responses to China No Help In Recession

    1. cathy says:

      Are you saying that because China is because it is a strong manufacturer that is wrong? Because they buy raw materials (cheaper price) & produce something that is needed (higher price) thereby they run in a "trade surplus?" Is that what you are saying?

      If I'm correct, then shame on Heritage. I would suggest a better article. Talk about the wages and their affect on manufacturering. Talk about how everyone wants cheap and so manufacturers have no option but to stay in low labor cost markets. Talk about that affect. We need to be talking about the underlying reason not the effect….

    2. Tim Teng, Fremont, C says:

      You and I have the option/freedom not to buy 'Made-in-China', but don't blame the Chinese for providing the goods and/or the Chinese for not spending like we do. I'm surprised w/ this typical liberal (i.e. I know what's best for you) thinking here.

    3. Derek Scissors, Ph.D. Derek Scissors, Wash says:

      Cathy, Tim:

      I understand your reaction but this isn't primarily about Chinese policy.

      The main point is that China is not currently contributing to global growth, much less leading the world out of recession. I'm criticizing people who misrepresent that fact.

      "Among other things, this will prompt a chorus of claims that China is leading the world out of recession.

      Wrong."

      Some of the underlying issues will be addressed in the larger paper due out this week that this is a part of.

    4. Grand Dragon says:

      China is buying goods from certain countries, goods that it needs for its own economy and paying those countries hard cold cash. China doesn't need crap like suv's and video games and nonsense like that. So if the united states has nothing to offer China, than my dear boy don't blame China. It's your own country's fault. And….ultimately the united states' problems are its own.

    5. Bradley, UT says:

      I would actually have to agree with Heritage on this one. China is using trade to boost its own GDP, and lots of what it is getting in return for its american exports are US Treasury Bonds, which currently are far below what their actual worth is because of the deficit. To me it seems like false growth.

      For China's sake, they would be better off developing their own domestic economy and maybe trading our ipods, video games and action figures they manufacture for us in exchange for something other than US Treasury Bonds.

      Correct me if I'm wrong.

    6. winston, australia says:

      Wow, what a terrible misunderstanding of economics.

    7. HawkWatcher, Mi. says:

      And we all know that China practices free and balanced trade and would never dream of manipulating their currency values…

      I've already heard the "China showing us the way" mantra, and this article presents useful fodder for re-educating the misunderstanders in a debate.

    8. hadenough says:

      cathy…. we would not be in the position we are in now ,if were not for greedy manufactures,who sold us out all in the name off greed . we would not have had to buy chinese crapp, stuff that never worked or fell apart and we would still have our jobs, houses and family .dont blame the chinese blame idiot politicians,corrupt banks and financial crooks.even when all this is over the poor will be poorer and the rich will be super rich.and parasite polictions will still be lurking in the back ground waiting to stuff it up all over again.

    9. Louis L Cesar F Levy says:

      It is not easy to lead when man is unconscious of hidden plans which, while not that decisive, contribute to shape a specific world, wanted just by those same would-be-hidden-plans appliers.

      Faking is one of the tools would-be-mind-control-Users suggest abundantly. What this have to do with economics? How can one pretend act in this world without including the economical dimension. In that one too we have to think about higheconomics just as man can think about highpolitics. Here is the domain where endeavor to shape politics for economies also take place.

    10. Tim Az says:

      I think I understand the point being made here. China can not move any closer to capitalism and maintain the pressure of their boot on the Chinese citizens throat. When a countries wealth is held by it's citizenry the govt. loses control of its subjects. There fore they can only gain wealth through trade with other countries that promote capitalism. I suspect that America has been their biggest customers until Americas govt. decided to ignore the will of its people. And began the sprint towards socialism. By collapsing the dollar along with the capitalist system. There by removing wealth from the people rendering them helpless and willing to accept total domination from their govt. for a slice of bread and some pork fat. They first must get health care passed to ensure that the point of no return has been reached. Guarantying their will not be enough time to recover from the damage they have inflicted upon the capitolist system. That said we still can win this fight against health care by pitting Democrat against Democrat in their fight for the peopels votes to keep them in DC after the next election.

    11. Bradley, UT says:

      Hey, give me a break for my "terrible misunderstanding" of economics. I'm not that old, and I'm trying to understand better. If you could tell me where I was wrong and explain it to me in simple terms I would appreciate it. It is better to educated someone ignorant than just tell them that they are wrong.

    12. hadenough says:

      to d……scissors could you tell me why my letters never see the light of day.could it be, to many scissors or maybe you dont like fair criticism??? .

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