By Bilal Hafeez 02-10-2019

How Financial Repression in China Helped Cause the Trade Wars (Odd Lots)

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(You can listen to the podcast by clicking here)

Michael Pettis, Finance Professor at Peking University and a Senior Fellow at the Carnegie endowment, discusses whether China has achieved its goal of rebalancing its economy. Pettis argues that China is progressively moving from an investment-driven economy to a consumption-driven one. He discusses the required structural change and how the US trade tariffs will affect this. Pettis highlights that the tariffs actually fail to achieve their aims. Tariffs merely change relative prices and shift bilateral trade, but they do little to change underlying savings investment balances. China’s excess savings have to be exported somewhere, and the US economy is still likely to be the top choice (where there remains an ongoing shortage of savings). As such, tariffs will do little to correct the US current account deficit.

Why does this matter? The trade war is unlikely to drive a rebalancing of global trade. For this to happen, we need to see structural shifts in domestic savings and investment of both US and China’s economies. This means that trade tensions will not dissipate quickly – China’s rebalancing toward a more consumption driven economy is ongoing but intrinsically gradual.

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