Krugman to China: Float yuan or risk protectionist backlash

NEW YORK Times op-ed columnist and Nobel laureate economist Paul Krugman says that in next year China must float the yuan or feel the sting of a global protectionist backlash.

"China has become a major financial and trade power. But it doesn't act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. That is predatory," said Mr Krugman.

"Unlike the dollar, the euro or the yen, whose values fluctuate freely, China's currency is pegged to the dollar. Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses," he said.

"Under normal circumstances, the inflow of dollars would push up the value of China's currency, unless it was offset by private investors heading the other way. And private investors are trying to get into China, not out.

"But China's government restricts capital inflows, even as it buys up dollars and parks them abroad, adding to a US$2 trillion-plus hoard of foreign exchange reserves," said Mr Krugman.

"My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing US employment by around 1.4 million jobs. The Chinese refuse to acknowledge the problem.

"The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I'd urge China's government to reconsider. Otherwise, the very mild protectionism it's currently complaining about will be the start of something much bigger," said Mr Krugman.
 

Source: SchedNet