If Obama Doesn't Balance Trade, China Will Steal More U.S. Industries

| About: The Boeing (BA)

Whenever President Bush needed a backdrop for a pro-free-trade pronouncement, he would travel to Seattle and stand before the Boeing (NYSE:BA) production factory, claiming that his policies were helping America's exports. In his view, the United States was exporting the kinds of goods that we produce most efficiently in return for the kinds of goods that our trading partners produce most efficiently.

But China has a different understanding of how trade works. She wants to produce both the goods that she produces efficiently as well as the goods that we produce efficiently. She has been practicing the old mercantilist strategy of maximizing exports and minimizing imports in order to steal her trading partners' industries.

At present, China is facing a severe recession, perhaps deeper than ours. Her original stimulus plan was a combination of export subsidies and infrastructure projects. But that plan was not big enough, so she may now be planning to accelerate it through subsidies to her fledgling aircraft industry, so that she won't have to import aircraft from Europe or the United States. In a January 13 commentary, Ambrose Evans-Pritchard wrote:

Premier Wen Jiabao said Beijing will broaden its $600bn (£405bn) fiscal stimulus package by bringing forward investment in science and technology projects. This may include plans for Chinese-built passenger jets able to match Boeing and Airbus. "Our aim is to be the first to recover from the financial crisis," he said.

Chinese aircraft production will be inefficient for quite some time, but that won't matter. She'll just slap a tariff on foreign aircraft to go along with her 25% tariffs on foreign vehicles, auto parts, and mining machinery.

On this side of the Pacific, America's latest Nobel Prize winning economist, Paul Krugman, wrote recently that the surest way to get the US out of the recession would be to fix the trade deficit:

A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

Krugman, however, is unlikely to endorse any plan that would balance trade, such as Warren Buffett's Import Certificates plan, because doing so might harm China. He wrote:

[T]he rest of the world may not be ready to handle a drastically smaller U.S. trade deficit. As my colleague Tom Friedman recently pointed out, much of China’s economy in particular is built around exporting to America, and will have a hard time switching to other occupations.

President Obama will have a choice to make soon after his inauguration. If he moves to balance trade, then the United States will be the first country out of the recession. If he tries to stimulate the American economy without balancing trade, then China will steal more of our industries.

Disclosure: no positions