Yes and Not Yes

I just watched a very interesting presentation (and relatively short at about 27 minutes) by Dr. H. “Woody” Brock, President of Strategic Economic Decisions, about the threat of  China and the 5 general misconceptions of concensus views.

Here are the 5 questions Brock poses regarding the concensus views of China:

• Is it true that a higher yuan would not improve the US trade deficit?
• Do those who celebrate the virtues of “cheap Chinese imports now” not understand there is no free lunch?
• Who says the very low US savings rate is in fact the principal reason for the vast US trade deficit?
• Is it true that the Chinese will retaliate by “pulling out their money” and/or by reducing their ongoing purchases of US treasuries?
• On what grounds is the yuan “only” undervalued by 15%-25%?

Brock addresses each of his questions in language that is easy to understand. Non-economists should be able to wrap their minds around the concepts which Brock discusses. 

In conclusion, Brock attempts to answer what should be done about China using the paradigm of game theory. There are three factors that influences the outcome of bargaining between China and the U.S.: (1) the relative risk aversion of the bargaining nation, (2) the relative threat power, and (3) the relative coalitional muscle. Brock essentially says that although the U.S. in theory has the upper hand on two of these three factors, he is worried that the U.S. is incapable of capitalizing on its strengths in order to bargain successfully with China. Brock is worried about the future of the U.S. in relation to China and Asia.

Though I think everyone has heard of “the Chinese threat” or some such variation on that phrase, most don’t really understand the nature of the threat, which is largely economic in nature, though there is a growing military threat. This presentation does a good job providing some simplified concensus views of China and also his arguments that the concensus views are wrong. Watching this will help you understand better the nature of the threat from China.