Krugman: China sends us poisoned toys and we send them toxic securities

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Princeton professor Paul Krugman won the Nobel prize last year for his work in global trade theory. But thanks to his work as a New York Times columnist, he is getting far more attention for his public pronouncements than his elegant equations. As an expert on the matter, his latest remarks on international trade given at the World Business Forum are priceless, specifically the China-U.S. relationship.

Most importantly, his comments question an idea promoted by Bill Clinton and countless others -- that economic integration of countries around the world is always a good thing. Back on November 2003, I spoke at a conference in Hong Kong (in the same spectacular hotel where Sarah Palin appeared last month) which Clinton wrapped up with an exceptionally lucid speech on the idea that if all the countries of the world become economically interdependent, they will be less likely to terrorize each other.

But Krugman is harping -- rightly so -- on the dangers of such interdependence. As WSJ @ World Business Forum reports, Krugman presented data showing that the level of global trade had fallen off more in the current financial crisis than it did during the Great Depression, pressuring economies around the globe.

His remark about the trade between the U.S. and China -- "They send us poisoned toys and tainted seafood and we send them toxic securities" -- is funny, but it does not get to the depth of the mutually assured destruction inherent in this relationship. China needs us to buy its goods and we need China to buy the debt we use to finance those purchases, fight two wars, and so on.

China leads the world in its $1.2 trillion in holdings of Treasuries or U.S. government agency debt. But China has suffered to some extent from this policy because of the weakening of the dollar as those holdings of U.S. debt have declined in value along with the dollar. Yet the weak dollar has been helpful for U.S. companies seeking to sell their goods overseas.

In other respects, this deal worked out well for China because during much of this decade, it depended on U.S. consumers to buy its cheaply manufactured goods -- $338 billion worth in 2008, according to AP. Though U.S. consumers' income was flat they could borrow money on credit cards and their home equity to boost spending.

But with U.S. consumers on the ropes they buy less. China has needed to replace that lost demand, and it did so by launching a $586 billion economic stimulus plan to boost Chinese consumer demand. The U.S. stimulus plan has not done the same and as a consequence, while the U.S. remains mired in a recession, China is expecting an eight percent economic growth rate.

Krugman is right that we traded different kinds of poison with each other during much of this decade, but it is now looking like the U.S. has less tolerance for that poison than does China. We're staggering as China gets right up off the floor and whizzes past us.

It's looking like the economic integration which Clinton celebrated and whose negative consequences Krugman highlighted is getting looser.

Peter Cohan is a management consultant, Babson professor and author of nine books including, Capital Rising (due in June 2010). Follow him on Twitter.

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