01 January 2006

2005/06 Rybczynski Prize Essay (2)

From T‑Shirts to T‑Bonds

Pam Woodall, The Economist

Global wages, prices, profits, interest rates and even house prices are increasingly “made in China”

“IF YOU want one year of prosperity, grow grain. If you want ten years of prosperity, grow trees. If you want 100 years of prosperity, grow people.” This old Chinese proverb crudely sums up how the entry of China’s massive labour force into the global economy may prove to be the most profound change for 50, and perhaps even for 100, years.

   Until a couple of years ago nobody cared much that the Chinese yuan was pegged to the dollar. Recently, though, this link has become one of the hottest issues in international politics, widely blamed in America for its huge trade deficit. But in fact, China is not the main cause of the American trade deficit. As chart 1 shows, most of the increase in America’s trade deficit has come from outside China. The main cause of America’s trade deficit is a lack of domestic saving, not unfair Chinese competition. The deficit is thus made in America, not made in China. On the other hand, China is behind almost everything else going on in the world economy. For China is beginning to drive, in a new and pervasive way, economic trends that many countries assume to be domestically determined. Everyone knows that most TVs and T-shirts are “made in China”. But so, in some ways, are developed countries’ inflation rates, interest rates, wages, profits, oil prices and even house prices—or at least they are strongly influenced by what happens in China.

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