American Recession, Chinese Depression? Parallels to 1929

Is China today like the U.S. in 1929?

This morning brings reports that U.S. imports plummeted in November.Since August non-petroleum imports, adjusted for inflation, are down 10% with no sign yet of a bottom.

At the same time, Chinese exports are starting to fall. According to this morning’s report,

Exports were down 9 percent from a year earlier in yuan — a jolting deceleration for a country where exports were still growing at an annual rate of nearly 30 percent in the summer of 2007.

The odds are that this decline in Chinese exports will continue. What does this mean for China’s economy?

Here’s one clue. If we look back at the Great Depression, we see that the U.S. was hit harder than virtually any other European or Asian country. For example, between 1929 and 1932, industrial production plunged by 45% in the U.S., compared to 41% in Germany, 26% in France, and 11% in Britain (see table 1 here )

Measures of real GDP shows an even bigger disparity between the U.S. and other countries in the Great Depression.

Where the Great Depression Hit the Hardest
Change in Real GDP, 1929-1933
United States -29%
Germany -10%
France -9%
Italy -3%
United Kingdom -2%
Japan 11%
Data: Angus Maddison

The plunge in U.S. real GDP from 1929 to 1933 was far bigger than comparable countries, at least according to data from Angus Maddison.

Why the disparity? There’s all sorts of reasons, relating to monetary policy and other factors. But in part, the U.S. was hit harder because it was a ‘trade surplus’ country—that is, a net exporter of goods. By contrast, Great Britain (for example) was running a sizable merchandise trade deficit in 1929, so cutbacks in spending would be felt more outside of Britain.

The question now is whether China, and more generally the trade surplus countries of East Asia, are going to play the role of the U.S., as acted out in 1929 and the years that followed. Already Korean and Taiwan exports have been collapsing (see Brad Setser here)

Michael Pettis, a professor at Peking University’s Guanghua School of Management, has been arguing the position that trade surplus countries such as China are going to be hit hard. He writes here:

We are now in the second stage of the crisis, in which trade-surplus countries must adjust after the forced adjustment in trade deficit countries. However, the US is so much larger than China, and it is adjusting so rapidly, there’s a real risk that the Chinese economy will be overwhelmed. Policymakers, especially in the US and China, must ensure that this adjustment takes place in the least disruptive way possible. This requires that as the major trade deficit and trade surplus countries, the US and China must coordinate fiscal and monetary policy so as to slow the process down.

I think there’s a very good chance that by this time next year, the economic damage in China will be worse than in the U.S.

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