With America shaking off the buying binge of the mid-2000s with the worst financial crisis since the Great Depression, the trade surplus is beginning to expand again with China. Trade figures during the summer had actually narrowed as American buyers simply took a rest from all that consumption – even imports of oil took a dive, as Americans used their cars less, while some traded over to less gas-guzzling models.

Paul Krugman writes in his New York Times Op Ed piece that now that China’s yuan valuation policy is artificially holding down the prices of its export sector. In other words, China is trying to export its way out of the global economic downturn by making keeping the price of its goods artificially low. The strategy will only aggravate its relations with America and Europe, as the Western countries still have preternaturally high unemployment rates. Unvalued goods that flood the Western markets will in no way help the Western countries get people back to work by allowing their own export sectors to recover from the trade melee.

The Chinese strategy will backfire by further straining relations with trade partners. Domestically, China’s approach to keeping its export sector from imploding the same way it had during the winter of 2008 will result in a lower ceiling of consumption in Western countries, as the unemployed are the least likely to go out and buy more stuff until they’ve in found jobs. Further, in the long run, Chinese policy is not doing exporters any favors: Chinese manufacturing is still amongst the most wasteful and – from an operations point of view – least productive in the world. Only when trade policies come in line with international norms will Chinese factories improve productivity and the less competitive simply fall away, as market principals would dictate.

Chinese trade policy makers need to realize international trade policy is not like driving a car in China, in which the first to blink loses the right of way.

Further reading: NYT