Cutting off garment supplies from China will leave the US naked

PUBLISHED : Tuesday, 24 May, 2005, 12:00am
UPDATED : Tuesday, 24 May, 2005, 12:00am

'But Mr [United States Federal Reserve chairman Alan] Greenspan poured cold water on the idea that a revaluation [of the yuan] would shrink the record [US] trade deficit. Instead, it will mean that suppliers will turn to other countries such as Malaysia or Thailand for cheap textiles and other goods that China now supplies, he said.'

SCMP, May 22

IMAGINE THE TABLES turned. What reaction would you expect if a Chinese government official who speaks no English and had only rarely visited the US were to pontificate on the US economy to an audience in New York?

Mr Greenspan, do me a favour. Look at the first chart and tell me again that suppliers will just turn to Malaysia or Thailand if they encounter a hitch in sourcing cheap garments out of China. Go on. We are a bit short of laughs here at the moment.

The mainland last year accounted for 70 per cent by value of all garments exported from Asia, including from the Indian subcontinent. Thailand's share was 3.1 per cent and Malaysia 2.3 per cent. In case you ask, I have taken 80 per cent of Hong Kong's garment exports here as having come from the mainland because, in fact, they did.

Now, just how precisely do you expand Thailand's garment production capacity 10-fold to get a smooth and rapid transition from sourcing in China? How do you find and train all the skilled workers (garment-making is a skilled trade)? How do you have all the plant and equipment ready for them in sufficient time, how do you ensure the quality control, how do you make all the shipping and other needed arrangements so that everything goes tickety-tick as suppliers casually jump from China to Thailand?

How do you do it?

Answer: You don't.

Mr Greenspan, you made your career as an investment banker, not as a manufacturer. The scale of the business you are talking about is much too great for rapid transitions. If you cut China off as a garment supplier to the US, then find yourself a quick source of fig leaves. You will not have much else to wear for a few years.

'In other words, the US has developed an addiction to Chinese dollar purchases and will suffer painful withdrawal symptoms when they come to an end.'

Paul Krugman,

Know-it-all economist,

SCMP, May 21

YES, THESE PUNDITS from New York do not come to us one at a time. If we had barter trade - goods exports from China to the US against hot air exports at $1 per breath from the US to China - it would be the US that runs a big trade surplus with China, not the other way round.

Mr Krugman's point is the obvious one about how the balance of payments must balance. All those US dollars that China takes in from its big trade surplus must be invested somewhere outside of China. They are not invested in China because, if they were, China would not have a trade surplus.

And it is easy to see where that money is going, he argues. It is going into purchases of US government debt. Without this inflow to alleviate the pressure of a huge fiscal deficit, US interest rates would already be sharply up and they soon will be if China can no longer generate a big trade surplus.

Mr Krugman, do me a favour. Look at the second chart. It shows that the big buyer of US government debt paper in recent years has been Japan, not China.

Your own government's figures show that China's net purchases of Treasury bills, bonds and notes since that warmonger in the White House took office in 2001 amounts to less than 5 per cent of his blow-out in federal debt securities.

It was Japan that almost single-handedly took care of his growing fiscal deficit for more than two years until the end of last year.

But notice also that Japan has now grown tired of the game. It is buying no more. It wants out. If you now start to feel those painful withdrawal symptoms, Mr Krugman, look a little east of China for the reason.