U.S., China Increase Trade Deficit: Win-Win Situation

According to statistics just released on Friday, America's monthly trade deficit in goods with China rose in January 2009 to $20.6 billion, as compared to December 2008 ($19.9 billion) and as compared to January 2008 ($20.3 billion), despite the worldwide recession.

During a worldwide recession, such as the one that began in October, the volume of trade falls as a result of falling demand. If the ratio of imports to exports stays about the same, the lower trade volume temporarily reduces the extent of any deficit or surplus. Indeed, America's overall trade deficit went down in January due to the fall-off in world trade.

However, from January 2008 to January 2009, the ratio of our imports to exports with China worsened. In January 2008 China sold us 4.5 times the goods that they bought from us, while in January 2009 China sold us 5.9 times.

America's strategy, under Presidents Bush and Obama, has been to borrow money from China in order to pay for increasing budget deficits, giving away American market share to Chinese producers:

• In May 2008, President Bush's Treasury Secretary Henry Paulson told Congress that China is not manipulating its currency. In response, China stepped up its currency manipulations, preventing the yuan from rising any further versus the dollar.
• In February 2009, President Obama's Secretary of State Hillary Clinton visited China, begging for more loans while telling Chinese leaders that the United States was not concerned about any other economic issues.

China's strategy is to increase their currency manipulations, grant WTO-illegal subsidies to their exporters, and ignore a WTO ruling that they reduce their tariffs on foreign-made autoparts. They intentionally produce a trade surplus with the United States while lending us the money to buy their exports, increasing our debt. Their purpose is to steal market share by manipulating trade.

The joint strategy of the American and Chinese leaders is working well. American leaders get to congratulate each other for engaging in unilateral free trade, even though we could get out of the worldwide recession by balancing trade. Chinese policy leaders get to steal market share from American industry throughout the recession so that they can dominate the world's future afterwards, replacing the hegemony of democracy with the Chinese brand of market totalitarianism. It's a win-win situation for the leaders of both countries!

Comments

[Steven Hansen:]

maybe we should learn mandarin.

Mar 18 05:33 AM

[beijingpaddy:]

Do you think this guy gets paid to write stuff like this? Who does he think his target audience is? Joe the Plumber? Maybe I am visiting the wrong blog site for informed discussions.

Mar 18 06:29 AM

[kelm:]

More xenophobic, reactionary writing with no data or analysis to back it up. Who on the SA editorial staff approves this stuff?

Mar 18 09:37 AM

[biomedlives:]

It's also worth noting that China's vast dollar holdings will give it leverage in foreign affairs in the future. A precedent is President Eisenhower's use of American pound holdings to force the UK out of Egypt in 1956.

Mar 18 10:55 AM

[Trane250:]

Richman keeps talking about "balancing" trade. How can we "balance" trade when we've forgotten how to make things? What we need is an industrial policy. The Japanese have MITI. We have the wrecking ball.

Mar 18 10:57 AM

[Jan E. Boet...:]

The US should with time launch an effort to make US products more competitive abroad. This is a challenging task but nothing impossible. Something many export dependent economies are constantly doing. Important ingredients are education, research and a a business community that gives international competitiveness high priority.

Mar 18 11:13 AM

[Billy Gee:]

Thank you Mr. Richman. We took an enormous chance in giving China a chance as a "trading partner" and play by a set of rules. What have they done with this huge risk? They have become grand master mercantile puppeteers and they are depicted as the winners and better competitors. The Reports to Congress by The U.S.-China Economic and Security Commission give the disappointing facts to us (on-line at their site. The only solution is Warren Buffett's plan for Cap and Trade. We buy and sell equal amounts to each to end the non-sense. The myth makers that spread false words that the U.S. has nothing to sell will be stifled.

If we are to continue to trade with China the mercantile energy of the bureaucrats must be channeled instead to ending counterfitting of foreign goods and software. Futher phony joint-venture schemes that tantalize with the prospect of the Middle Kingdom market must end the practice of stealing technology. The last practice I will include is the close relationship of gian U.S. --monopolies such as G.E.'s light bulb share in the U.S. -- and Chinese government controlled factories must end. I think that we have sleepy trade representatives that can't cope with the voracious ambitions of their adversaries. Any solutions out there?

Mar 18 11:27 AM

[huangthomas:]

The inexpensive goods we imported from China, such as shoes, clothing...are not consumer discretionary items. In economic hard time, our traffic to Wall Mart has not decreased, as a matter of fact, it probably increased.

China has control over foreign exchange and set the daily exchange rate. The practice is susceptible to exchange rate manipulation, but that does not means it is "highly" manipulated. As a matter of fact, there is no way we can balance our trade with China by exchange rate "reverse manipulation". Remember we do not manufacture those items any more and never encourage your children to dedicate their career to manufacturing those items. Before long, we'll see those goods labeled made in Vietnam, India, Indonesia......

As I see it, the only way to balance our trade is to sell them high technology know-hows, some of which are used in our weapon systems. China has asked for them for a long time. Do we want to sell them "Lenin's ropes?

Mar 18 11:31 AM

[Bulldawg88:]

How do you do that when governmental controls and regulations keep you from being competitive. I am an owner of a manufacturing company and I have too many people in our compnay do things that do not produce one penny of revenue, but I am REQUIRED to have them on staff. Every company that has to compete in the world market "gives international competitiveness" a high priority, otherwise we will be out of business. The harsh reality is that american workers are bloated in there self worth and this economic downturn will help to bring that down. Supply and Demand is going to force the price of labor way down.


On Mar 18 11:13 AM Jan E. Boethius wrote:

> The US should with time launch an effort to make US products more
> competitive abroad. This is a challenging task but nothing impossible.
> Something many export dependent economies are constantly doing. Important
> ingredients are education, research and a a business community that
> gives international competitiveness high priority.
>

Mar 18 12:31 PM

[Howard Richman:]

Huangthomas writes:

"The inexpensive goods we imported from China, such as shoes, clothing...are not consumer discretionary items. In economic hard time, our traffic to Wall Mart has not decreased, as a matter of fact, it probably increased."

We don't have to be importing these goods from China, we could be importing the same goods from Mexico, or almost any other underdeveloped country in the world. The difference is that if we imported them from Mexico, Mexico would spend 3/4 of the dollars they received to buy American exports. China spends 1/4. Sending our income to China is like sending it down a black hole. See my latest blog entry for a table that illustrates this fact:

tradeandtaxes.blogspot...

China has control over foreign exchange and set the daily exchange rate. The practice is susceptible to exchange rate manipulation, but that does not means it is "highly" manipulated. As a matter of fact, there is no way we can balance our trade with China by exchange rate "reverse manipulation". Remember we do not manufacture those items any more and never encourage your children to dedicate their career to manufacturing those items. Before long, we'll see those goods labeled made in Vietnam, India, Indonesia......

As I see it, the only way to balance our trade is to sell them high technology know-hows, some of which are used in our weapon systems. China has asked for them for a long time. Do we want to sell them "Lenin's ropes?

Mar 18 01:42 PM

[Howard Richman:]

Whoops, sloppy editing on my part. The paragraphs below the URL to my blog are frlom Huangtomas' original post.

Mar 18 01:45 PM

[James Lewis:]

Amercia adds the most value $-$ in its manufacturing than any other country in the world. So please stop, USA can not make anything anymore. Because they can and do.

Bernanke created 1 trillion USD today. With a couple of computer entries and some admin, the USA would have created the equivelent of 50% of China's Surplus in one sitting.

America are paying for good from China with money it can create. Its like me buying something off you with Monopoly money and someone else looking at the transaction and saying I am paying too much for what I am buying.

You can not compete with USA when they are printing the reserve currency and have the strongest military.

Mar 18 05:38 PM

[HALFTRACK:]

DEAR FOLKS ;YOU ARE NEVER GOING TO BEAT CHINA SO LONG AS YOU DO NOT USE PRISON LABOR TO BUILD YOUR PRODUCTS AS THE CHINESE HAVE BEEN DOING FOR A LONG TIME { ETERNALY } AND OTHER CHINESE AT A VERY LOW PAY RATE JUST ABOVE STARVING AND WITH COMMUNISTIC "MIND CONTROL METHODS" SO AS TO INSTILL UNWEAVING ORDER!!!!

Mar 18 10:52 PM

[honestdevil:]

I think the author has many good points, but I think he has a bit of satire (just look at his grinning face you guys!).

However I disagree with only a few points

(1) Definition of "US leaders" which he seems to equate with Chinese political leaders. In the USA, the true leaders are the financial king makers. Just see how GS was the first to pull 100% of their money out of AIG's bleeding guts using Paulson as a surgical glove! Now that Congress is unlikely to throw more good money after AIG, the rest of the "slower" world may only get pennies/$ on who knows how many hundreds of billions more!
So the point is American leaders are still the guys holding the purse strings and effective power - a cabal of back-room bankers and oil-men - perhaps - who knows?

(2) USA does NOT have any grand master strategy here. Like any street-corner cocaine addict the government keeps on going back to the well for more easy money ever since Regan, Bush Sr & especially Bush Jr. taking the $-printing press for granted. However, that is good only as much as others are willing to give them credence. One small remark by the Chinese premier had US politicians cowering - Obama mumbling the US$ & system is the safest. However, it is all about price dear man.

About time Americans stood up and became mensh!

Mar 19 01:26 AM

[Maklo:]

Howard keeps insisting that China practices "mercantilist" trade policy.

One of the core tenets of mercantilism that the global volume of international trade is fixed and therefore, it is a zero sum game. Another facet of mercantilism is in the use of tariffs and other subsidies to discourage imports. Another consequence, or contributing factor, to European mercantilism in the 17th and 18th centuries was the ability to seize natural resources in foreign lands (sugar and rum in the Caribbean, slaves from Africa, cotton from the New World) so in effect, they profited at each step in the value chain.

Point #1: The volume of world trade has increased many fold since China (and India, and the Eastern Bloc) entered the scene in the 80s and 90s. They made it possible to take advantage of inexpensive labor and make it productive through the use of invested capital. While this drove industry change and, in many cases, painful adjustments, the world is a better place today because of it. So point #1 - the Chinese have driven world trade, not suppressed it - they do not see it as a zero sum game.

Point #2, the Chinese economy is in the process of gradual liberalization and reform. It does protect certain strategic industries, such as telecommunications and banking, but many countries do. The U.S., for example, spends tens of billions every year producting the sugar and other agricultural industries. The reports below by the World Trade Organization summarize well the economic policies and trade policies of both the U.S. and China and I would encourage you to read them if you want to be educated on the subject by a respected and unbiased third-party organization.

www.wto.org/english/tr...
www.wto.org/english/tr...

Point #3, the Chinese economy is still by and large driven by labor-intensive, low value-add functions. The U.S. and other developed countries control high value add portions of the value chain. The commodity and energy rich countries control and profit from their resources. China is neither high value add today nor is it extremely rich in resources. They are struggling their way up the economic ladder through simple hard work and back-breaking sacrifice.

So based on these points, I refute the notion that China is a practicing "mercantilist".

Mar 20 11:49 AM

[biomedlives:]

I agree that supply and demand will force the price of labor way down, probably close to the level in developing countries. Then American workers won't have much money to buy consumer goods or pay taxes.


On Mar 18 12:31 PM Bulldawg88 wrote:

> How do you do that when governmental controls and regulations keep
> you from being competitive. I am an owner of a manufacturing company
> and I have too many people in our compnay do things that do not produce
> one penny of revenue, but I am REQUIRED to have them on staff. Every
> company that has to compete in the world market "gives international
> competitiveness" a high priority, otherwise we will be out of business.
> The harsh reality is that american workers are bloated in there self
> worth and this economic downturn will help to bring that down. Supply
> and Demand is going to force the price of labor way down.

Mar 23 11:59 AM

[Ames Tiedeman:]

Make me the Czar of economic policy in the United States and I will implement policies that will drive unemployment to 3% and rid the U.S. of its huge trade deficits with Europe, Canada, Japan, China, and South Korea. The U.S. economy is capable of growing 3.5 to 4% per annum. We have lost our own home market for industry after industry. We can no longer function as a nation that gets too little from foreign markets and now too little from our home market. A restructuring of economic policy must take place. Unfortunately we do not have the leadership in Washington to fix the broken system.

Jun 06 03:09 PM