I claimed in this post that China is effectively forcing a current account deficit on the US by controlling the capital account balance. China can control their capital account balance with the US because China has capital controls in place but the US doesn’t. A commenter says:
“the post makes it sound as if the US is forced to consume Chinese goods. It’s not. To borrow from the RBA, a current account deficit is a matter for ‘consenting adults’. The US was one of those consenting adults.”
In the comments to that post Andy Harless has already given the answer, Andy replies:
“As a US citizen, I consent to my own purchases of Chinese goods but not to my neighbors’ purchases. So a current account deficit is not a matter for consenting adults, at least if “consent” means active consent. The US does give passive consent by not restricting imports or manipulating capital flows. “
Andy’s exactly right but I’ll rephrase it in my own words because hey, I want to contribute too. Part of Andy’s point is that there is a huge coordination problem here, how can everyone in America all agree to stop buying Chinese goods? This sort of thing has been tried before, there were “Buy American” campaigns against Japanese goods in the 80’s. I don’t think it had much effect in the 80’s but why not?
Well, there is incentive to deviate for everybody individually, it’s not an equilibrium outcome. That’s what Andy means saying “I consent to my own purchases of Chinese goods but not to my neighbors’ purchases”. If everyone else boycotts Chinese made goods then the economy gets just as much benefit as it does if I alone deviate and buy the cheaper goods. On the other hand, there is no way to exclude me from sharing in the benefits of higher domestic employment and wages. As long as everyone everyone else avoids the Chinese goods I’m better off buying them, and everyone else goes ahead and buys the Chinese goods then I’m also better off buying them since they are cheaper. Thus, buying from China is a dominant strategy.
There is just no way for the private sector to coordinate reduced purchases of Chinese stuff, the only way is for the government to intervene and affect the coordination.by introducing either capital controls or an import tariff to make the imports more expensive. Neither of these is a good idea though.
Senior Quantitative Portfolio Manager, Co-Fund Manager
Jul 25, 2010 at 10:03am