After the economist Nicholas Lardy visited China in the mid-1980s, he came away distinctly skeptical. While Chinese leaders were gearing up for a huge export drive, Lardy predicted “a marked slowing in China's trade expansion in the years ahead.” In particular he questioned Beijing's reported plan to boost total Chinese trade (imports plus exports) to more than $200 billion by 2000. In a monograph published by the Asia Society in 1987, China's Entry into the World Economy, Lardy suggested the target was implausibly high.
In the event, Chinese policy-makers far exceeded their goal. China's exports alone in 2000 came to $249 billion and its imports came to $225 billion, making a grand total of $474 billion, more than double the ambitious target. Economists' predictions are often wrong, of course, not least about East Asia. But Lardy's errors are systematic. For two decades he has almost invariably undershot in predicting China's economic trajectory. Yet, despite these mistakes, Lardy remains one of Washington's preeminent experts on Sino-American economic relations.
Lardy is an iconic example of a Washington type: a designated expert who owes his prominence not to any record of superior authority but to the fact that he says what powerful lobbying interests want to hear. Lardy is a determined apologist both for the Beijing regime and for a U.S. trade policy that subordinates the long-term interests of the American nation to corporations' short-term profits. He is prominent in the field not because he is so often right on the issues but in spite of being so frequently wrong.
In two decades, China has gone from being a minor economic player to America's most visible creditor and the single biggest source of America's escalating trade imbalance. Administrations of both parties have allowed this to occur because it is convenient for corporations seeking low labor costs. Meanwhile, the U.S. Treasury needs ever-increasing foreign help in funding the trade deficit. As voices of concern are raised, Washington is desperate for expert reassurance. Enter Nicholas Lardy.
In 1995, Lardy moved from the University of Washington, where he directed the School of International Studies, to the Brookings Institution in Washington, D.C. He was one of Bill Clinton's academic China advisers. Then in 2003 he became a senior fellow at the Institute for International Economics, and is now their second highest paid employee with a $230,000-a-year package, not counting the speakers' fees the China lobby showers on its favorites. In an impressive measure of his visibility, Lardy has been generating new listings in the Nexis news clipping database at the rate of four or five a day. Meanwhile, he ranks alongside two former American ambassadors to China as a vice chairman of the National Committee on United States-China Relations. This committee initiated the so-called “ping-pong diplomacy” of the early 1970s and has acted as principal host to Chinese leaders in the United States ever since.
Lardy has been a reliably soothing voice, minimizing both China as an economic threat and as a nation that retains unfortunate despotic habits. In 1996, for instance, he helpfully downplayed an announced plan by Beijing to acquire managerial control of Western news agencies in China. Although the principal agencies involved -- Reuters and Dow Jones -- resisted Beijing's plain efforts to censor the news, Lardy offered a more innocuous explanation: Beijing was attracted to the media business by the prospect of making large profits! In the end, Reuters and Dow Jones protested so vociferously that Beijing dropped the plan.
In the immediate aftermath of the Tiananmen massacre, Lardy crusaded against the West imposing economic sanctions. He was a principal source for a New York Times article in which the Chinese economy was presented as a basket case. The article talked of a terrible Chinese balance-of-payments crisis, capital flight, corruption, a tottering banking system, out-of-control subsidies, runaway inflation, and the threat of an uprising by the poor, implying that top Chinese officials were economic ignoramuses. Lardy said China's attempted switch to a market economy had stalled and added: “It is hard to see what the sources of growth will be in the next few years.” In fact, in 1989 China's exports rose 10.5 percent -- slow growth by Chinese standards but actually three times Japan's performance that year. China went on in 1990 to boost its exports by 18.1 percent.
In giving evidence to a Senate subcommittee in 1991, he argued that China's then-incipient trade surplus was a temporary aberration and would soon be followed by deficits. His testimony helped keep American markets open to China's one-way trade policy at a time when memories of the Tiananmen Square massacre were still fresh. Yet it was already clear to most China experts that China was closely following the mercantilist approach to trade of the East Asian economic model. China's trade numbers were headed in the same direction as Japan's, Taiwan's, and South Korea's -- up. Contradicting Lardy's assessment, China's bilateral surplus with the United States, a mere $10.4 billion in 1990, rose to $12.7 billion in 1991, and to $18.3 billion in 1992. As of 2005, it had hit $202 billion -- the largest trade imbalance between any two nations in history.
He has consistently served as one of Beijing's most trusted allies in the fight against “China-bashing.” In 1994, he declared that China was already “one of the most liberal economies in the developing world,” citing its increasing openness to foreign direct investment. More than a decade later, this investment still occurs only on terms allowed by the Beijing government, which limits majority control, demands sensitive technology transfer, tolerates piracy of intellectual property, restricts foreign involvement in the sensitive banking sector, and promotes the use of China as a low-wage corporate outsourcing base.
Perhaps Lardy's greatest service came in helping China's negotiations to join the World Trade Organization. In testimony before Congress in April 2000, he strongly urged that China be granted permanent normal trade relations. “The failure of the U.S. Congress to grant permanent normal trade relations would undermine the position of reformers in China,” he declared.
Meanwhile, his wildly erroneous predictions continued. In July last year, for instance, Lardy predicted an overall Chinese trade surplus of $75 billion to $80 billion for 2005, less than half of the actual figure of $161 billion. In commenting to Business Week Online in January 2006, he contrived to sound as if China's trade performance in 2005 somehow reflected weakness rather than strength. Explaining why China's global surplus had risen in 2005, he said: “The big driver isn't on the export side but on the import side. Export growth fell a bit, but import growth was barely half what it was in 2004, so there has been this ballooning of the trade surplus.”
Poor China, you might think. Yes, the growth in imports at 17.6 percent was a little lower than the average for China in recent years. But a mercantilist East Asian nation hardly worries about subpar import growth. The real story was China's exports, which grew by 28.4 percent.
Lardy is hardly alone as a China apologist. However, he has more to answer for than most. As a Chinese-speaking East Asia specialist, he has long had a front-row seat in witnessing China's successful emulation of the highly aggressive East Asian trade model. But he manages to avoid pointing out the plain fact that East Asian mercantilism works. All the East Asian economic miracles have been driven by savings. The region's savings rates in turn are based on suppressed consumption. And the cornerstone of the region's suppressed consumption policy is mercantilist trade.
Lardy proves the wisdom of the observation of John Kenneth Galbraith that it is better for one's career to be conventionally wrong than unconventionally right. As Pat Choate, author of several books on trade, points out, journalists who cover U.S.-China relations would do well to consider the track record of the experts they quote.
Eamonn Fingleton is the author of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999).
