On Thursday, the Bureau of Economic Analysis released trade statistics which showed that the U.S. trade deficit fell in July. But the July data was along the same upward trend line as the February through May data.
The following chart shows the monthly U.S. trade deficits from 2009 (blue) and 2010 (red). This is the full trade deficit, including both goods and services, and has been calculated on a seasonally adjusted basis:
About half of our trade deficit is our goods trade deficit with China. It is intentionally produced by the Chinese government as part of its successful mercantilist strategy, designed to maximize exports and minimize imports. That strategy was explored by Peking University professor Heng-Fu Zou in his article, Dynamic Analysis of the Viner Model of Mercantilism which appeared in the 1997 volume of Journal of International Money and Finance, and then implemented by the Chinese government at the beginning of this century. Seeing the Chinese success, many other governments have been implementing the same mercantilist strategy.
The Chinese government uses yuan to buy dollars in foreign exchange markets to prevent the yuan from rising and the dollar from falling to a trade-balancing level. Then it loans those dollars to Americans. At the same time, it takes various measures to keep out American imports (tariffs, purchasing restrictions, freely permitting piracy while delaying legitimate items, etc.). Here is our trade deficit in just goods (not services) with China, not seasonally adjusted:
During the near-term, the mercantilist country loses consumption while the victim country gains it. For example, the Chinese worker has remained poor, despite the rapidly growing Chinese GDP. Meanwhile, in the United States, mercantilist governments supplied the loans which allowed the American consumer to borrow and live beyond his means until our housing bubble burst in 2006. During the Obama administration mercantilists have been supplying the loans which have been allowing the federal government to live beyond its means without causing much change in long-term interest rates.
But in the long run, the opposite happens: the mercantilist country gains consumption and the victim country loses it. China has been growing by about 10% per year. Meanwhile, its victim, the United States, loses industries, goes into debt, and its growth slows. The eventual result, as John Maynard Keynes predicted in his magnum opus, is a perpetual state of depression in the victim country, a state that we entered in the United States in the fourth quarter of 2007.
The Obama administration has been relying upon ineffective talk to persuade China to switch from the policies that have caused its economy to grow and ours to falter. Meanwhile China has been politely ignoring whatever Obama says. For example, last weekend President Obama dispatched Lawrence Summers to China to try to persuade the Chinese government to let its currency strengthen vs. the dollar. The Chinese government gave Summers the royal treatment, including meetings with the head of the People's Bank of China and the Chinese President, but they did not make any concessions. Robert E. Scott, writing in the Huffington Post (Summers brings back bubkes from Beijing), wrote:
Larry Summers, Director of the National Economic Council, returned empty handed from meetings this week with Chinese President Hu Jintao and other senior government officials. Although China announced in June that it would allow its currency to fluctuate, the yuan has gained less than one half of one percent since then. Summers was officially rebuffed by a spokeswoman for China's Foreign Ministry, who said, "Our exchange rate reform can't be pressed ahead under external pressure." Time has run out on negotiations. The House Ways and Means and the Senate Banking, Housing and Urban Affairs Committees will both hold hearings next week on China currency and will consider tough legislation such as Congressman Tim Ryan and Tim Murphy's Currency Reform for Fair Trade Act (HR 2378) and similar legislation introduced by Senators Chuck Schumer and Lindsay Graham.
Now it's up to Congress to decide whether they want to continue to enable mercantilism. There are several excellent proposals on the table that would take the profit out of it. For example, University of Maryland economist Peter Morici (Obama, Pelosi Neglect of Trade Deficit Imperils Recovery) proposes a tax on mercantilist currency conversions. My father, son and I propose a scaled tariff (U.S. Growth Slows Due to Trade Deficit) on our imports from mercantilist countries.
Congress is being held accountable by the American voter for the state of the American economy. The Democrats have been pretending to be concerned about the trade deficits, but when they have power, they do nothing. The Republican leadership does not even pretend to be concerned. Both parties need to decide whether or not they will continue Trading Away Our Future.
Disclosure: I own Chinese yuan through CYB
