Monday, December 8, 2008

China Oversupply vs US Overconsumption

Beijing University finance professor Michael Pettis says that the most likely way out of this imbalance is that U.S. household savings must go up, and Chinese production must come down. "There's two ways production [can] come down. One way is the way it happened to America in the 1930s, where basically American overproduction collapsed," Pettis says. "We could have that in China — China overproduction could collapse. China may try to protect it, by exporting more, but my fear is that that creates a trade war, in which case it will have to come back to China." Pettis points out that 80 years ago, the tables were turned — it was the U.S. that was exporting its oversupply of goods to Europe. And its efforts to protect those exports, such as the Smoot-Hawley Tariff Act of 1930, led to a bruising trade war, falling foreign trade and an even harder economic landing.

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