Stop piling up greenbacks to build a more balanced economy

In recent months, <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />U.S. economist Paul Krugman wrote several op-ed pieces calling on the U.S. government to take on China. He is a respected economist, but his campaign is not only counter-productive in terms of solving the China-U.S. trade dispute but also based on flawed economics.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

In 2009, China registered a growth rate of 8.7 percent, which was hailed by the international community as a significant contribution to the global recovery.

However, for Krugman, "most of the world's large economies are stuck in a liquidity trap China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies. China's policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery."

In Krugman's view, by running a trade surplus, China must be a drag on global recovery. He forgot one important fact that while China has a trade surplus, the growth rate of China's trade surplus fell significantly in 2008, and turned negative in 2009.

This is because China's imports have held out quite well, which in turn was a result of the Chinese government's massive stimulus package. For example, in real terms, in 2009 the growth rate of China's exports to the rest of the world was -10.5 percent and that of its imports was 1.7 percent.

As an elementary economic issue, when calculating the contribution of the trade balance to overall economic growth, the important thing is the changes in trade balance instead of the level of trade balance. Because China sucked in imports at a greater pace than it pushed out exports, it made a positive contribution to global recovery.