The Pettis Paradigm and the Second China Shock

Exporting your way out of a recession is fine and good — it’s basically how Germany and South Korea shrugged off the Great Recession in the early 2010s.3 But China’s export boom is heavily subsidized, both with explicit government subsidies, and — more importantly — with ultra-cheap abundant bank loans. Subsidies are distortionary — they mean that ... See more

• Competition (also called “market structure”) can throw a wrench into all of this. Trade is carried out by companies, and whether Chinese companies and American companies end up making profits on their exports and their domestic sales will affect how they behave. Domestic competitive environments and international competitive environments both matt

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• There are all kinds of wrinkles and complications that affect trade, called “ frictions ”. These include things like home bias in both consumption and financial investing, sovereign default, currency market frictions, and so on. Economists argue back and forth about which of these frictions cause the various “puzzles” in international trade — disco

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The “other countries should put tariffs on China” idea and the “China should shift its economy toward domestic consumption” idea are unified in the worldview of Michael Pettis, who has advocated both things. He has been saying that China needs to increase the share of consumption in its domestic economy for well over a decade, and it seems to me th... See more