American economists like Paul Krugman and Maurice Obstfeld deny that foreigners can drive US internal imbalances, but if Chinese consumption responds to Chinese policies, this means that by controlling its trade and capital account, Beijing drives not just China’s internal imbalances but also its external imbalances (the two must always be perfectly aligned). But if Chinese policies can drive its external imbalances, they also drive the external imbalances of the rest of the world and, like it or not, “the rest of the world” might include the US.
@raginrayguns Pettis today; I think Krugman can still claim that Reagan is responsible for the imbalances by noting his role in financial deregulation? or there is this commentary:
Tax differences also influence international capital flows. Both defenders and critics of the Reagan administration’s 1981 tax cuts agree that they caused increased capital inflows during the eighties. Defenders argue that U.S. investments became more profitable after tax than non-U.S. investments, both to U.S. investors and to foreign investors, while critics argue that large federal deficits drew the capital inflows.
but the timeline in China is something like this:
1976: Mao Zedong dies
1978: Deng Xiaoping takes power
1979: first special economic zone, joint ventures, foreign investment
1984: price liberalisation and moves away from central planning
this led to the biggest economic turnaround in world history:
In the pre-reform period, industry was largely stagnant and the socialist system presented few incentives for improvements in quality and productivity. With the introduction of the dual-price system and greater autonomy for enterprise managers, productivity increased greatly in the early 1980s. Foreign enterprises and newly formed Township and Village Enterprises, owned by local government and often de facto private firms, competed successfully with state-owned enterprises. By the 1990s, large-scale privatizations reduced the market share of both the Township and Village Enterprises and state-owned enterprises and increased the private sector’s market share. The state sector’s share of industrial output dropped from 81% in 1980 to 15% in 2005. Foreign capital controls much of Chinese industry and plays an important role.
From virtually an industrial backwater in 1978, China is now the world’s biggest producer of concrete, steel, ships and textiles, and has the world’s largest automobile market. Chinese steel output quadrupled between 1980 and 2000, and from 2000 to 2006 rose from 128.5 million tons to 418.8 million tons, one-third of global production. Labor productivity at some Chinese steel firms exceeds Western productivity. From 1975 to 1992, China’s automobile production rose from 139,800 to 1.1 million, rising to 9.35 million in 2008. Light industries such as textiles saw an even greater increase, due to reduced government interference. Chinese textile exports increased from 4.6% of world exports in 1980 to 24.1% in 2005. Textile output increased 18-fold over the same period.
This increase in production is largely the result of the removal of barriers to entry and increased competition; the number of industrial firms rose from 377,300 in 1980 to nearly 8 million in 1990 and 1996; the 2004 economic census, which excluded enterprises with annual sales below RMB 5 million, counted 1.33 million manufacturing firms, with Jiangsu and Zhejiang reporting more firms than the nationwide total for 1980. Compared to other East Asian industrial growth spurts, China’s industrial performance exceeded Japan’s but remained behind South Korea and Taiwan’s economies.
Reagan cutting taxes, running deficits, and raising interest rates obviously had an economic effect but China changing from a Maoist backwater to the industrial powerhouse of the world surely had more of an impact (and of course Japan, Korea, and Taiwan also maintained their export surplus throughout this period).
