Western countries have long been accused of being glib about economic matters, and now we’re facing the consequences of our hubris. Our ceaseless insistence that our our economic system is stable and that everyone should aspire to copy us makes us look really stupid now in the eyes of the many other countries which did not or could not do what we did – live on credit.
Many transition economies and developing countries will suffer as a consequence of the credit crunch. In a globalised world in recession, globalised trade will suffer, and export-dependent countries will feel the pinch acutely.
So, in a way, I can’t blame the leaders of China and Russia for scolding the West. The greed and blind faith in funny money have caused most of the trouble. But there is another side of the story, namely that of the balance of trade. A balance of trade is the difference between the value of goods exported to one country, and the value of goods imported from the same country. So, if country A exports goods worth $100bn to country B, but only imports goods worth $40bn, then the balance of trade is positive for country A, as it exports more. For country B, on the other hand, the balance is negative. So, country B depends strongly on country A to provide it with the goods and services that country B cannot or does not produce. If country A stops producing these goods, then things don’t look good for country B. It will either have to go without, find another country where it can buy these goods from, possibly at a much higher price, or start producing the goods themselves – but that can’t be done overnight. Country A on the other hand is also interested in country B continuing to buy its goods. If they suddenly stop buying, then it has to find another market – but there might not be one, so its economy can also be hit by a sudden drop in exports.
So, overly skewed balances of trade are not good for either party. And this is where China’s remarks on America’s greed become interesting.
For the US, the balance of trade with China has long been negative, i.e. the US imported far more goods from there than it exported to China, as these figures on the balance of trade between the two countries show. In 2008, the US imported nearly 4 times more from China than it exported there. And we’re not talking peanuts. We’re talking goods imported from China to the tune of US$312bn, while the US only exported goods worth US$66bn. The US trade deficit: $246bn in 2008 alone. There is something ironic in the biggest capitalist economy on the globe relying so much on the last major surviving communist power player (both politically and economic) in the world.
In the olden days, this dependency was considered dangerous for the US. What if there was a revolution in China, or their economy collapsed, or their goods became more expensive? The US would suddenly be unable to rely on the cheap imports that helped sustain their economy over the last decade.
But as it turns out, it was the US economy that collapsed, leaving China exposed to massively reduced demand for its goods and services, resulting in a slow-down in production and economic growth (note that this of course also applies for all the goods and services China exports to the EU).
This is bad news for China, and their premier is right to be demanding more of a say in the world economy. On the other hand, I’m assuming that China realised that its dependency on exports may come to haunt it at some point, and that its growth was partially fuelled by the Western greed that Premier Wen Jiabao rightly blames for the mess we’re in.
But we all, including China, have to realise that we all massively benefitted from the cheap credit that allowed us to buy houses, holidays, and other stuff. Never mind it was always clear it would not last. Never mind it was always clear it was unsustainable. But most of us have profited one way or another from it. I’m all for finger-pointing and blaming myself, but only as long as we remember that our credit bubble also was responsible for much of the economic boom we saw in many countries – growth that is now leaking out of the cracked bubble like gas from a leaky balloon. I don’t think that a player the size of China can pretend not to have realised that this is a bubble and will end sooner or later. Otherwise, they were just as blind to it as our Western economic soothsayers. And that would be really scary.
P.S.: The same argument goes for Russia, by the way- but there is only so much space in a blog.