Susmit Kumar, Ph.D.

In the U.S. more than eight millions are unemployed, with no relief in sight. Now economists have started predicting another recession. Political leaders and several economists, including Nobel Prize winner Paul Krugman, are blaming China for the economic condition. We need to stop blaming China. Instead we should accept the inevitable: The collapse of the global trade system (Please see chart).

Until the 2008 economic downturn, the administration was able to finance the twin deficits, i.e. budget and trade deficits, by printing dollars, taking the advantage of the dollar being the global currency. During the 1980s and early 1990s, it was mainly Japan who financed the deficits and during the 2000s it is mainly China who is financing the deficits. Now the debt has grown to an unsustainable level.

According to Krugman, China is playing a dangerous game by keeping its currency fixed to dollar and not floating it. Krugman’s suggested surcharge of 25 percent on Chinese imports is not going to help the economy. Between 2005-7 China allowed 20 percent appreciation in its currency, but the job losses continued in the US and the US trade deficit went on increasing during this period. Therefore any appreciation in Chinese currency is not going to help in creating jobs.

China has become the Walmart of manufacturing items, i.e. it is importing ingredients/minerals from all over the world, converts them into finish products, and then sells them to the entire world. Since 2001, its FOREX is increasing at a tremendous rate, leaving every one behind (Japan’s FOREX is about $1 trillion for the last one decade).

Capitalism is for maximizing the profit. Therefore Wall Street, which caused the manufacturing and service jobs to shift offshore, will never allow these jobs to return to the U.S. Also, in the very near future, several countries are going to face similar crisis. Countries like India, South Africa and Vietnam are becoming consumer countries like the U.S. and have sizeable trade deficits. Among the BRIC countries only India has a trade deficit, which is more than $100 billion a year. In India even Hindu gods are sold “Made in China.” With the increasing middle class, the trade deficit of India may even surpass the U.S. trade deficit in the next several years. As Indian currency is not a global currency, there is no way India can finance this much amount of trade deficit. Currencies of consumer countries like South Africa and Vietnam depend on foreign investment and at any moment of crisis, their currencies will nose-dive.

Hence, what we are witnessing is the structural failure of the global trade system.