Howard Richman's  Instablog

The overall U.S. trade deficit in goods and services (seasonally adjusted) edged down in November to $38.3 billion from $38.4 billion in October. Meanwhile the U.S. trade deficit with China in goods edged up to $25.6 billion from $25.5 billion, as shown in the following graph:

Demand in China is currently growing at about a 10.5% per year pace while demand in the United States is growing at about a 2.5% per year pace. Normally, this discrepancy would cause China's demand for American products to grow much faster than American demand for Chinese products. However, China practices mercantilism and America practices unilateral free trade.

Chinese President Hu will be visiting the United States from January 18-21. WTO rules let any country that has with both a net foreign debt and a balance of payments deficit enact a scaled tariff to balance trade. President Obama could insist that Hu reduce China's trade surplus with the United States.

An annual report from Freedom House finds that authoritarianism has increased in the world for the fifth straight year. According to Breitbart:

In "Freedom in the World 2011" the Washington-based Freedom House said it had documented the longest continuous period of decline since it began compiling the annual index nearly 40 years ago.

"A total of 25 countries showed significant declines in 2010, more than double the 11 countries exhibiting noteworthy gains," the group said.

"Authoritarian regimes like those in China, Egypt, Iran, Russia, and Venezuela continued to step up repressive measures with little significant resistance from the democratic world," it said.

Significantly, the report mentions China, Russian, and Venezuela as authoritarian regimes that have stepped up their repression of their own people over the last year. These are all countries that have run huge trade surpluses with the United States, stimulating their economies while sedating ours.

The following table shows these countries' trade imports and exports with the United States from October 2009 through September 2010. Although the China and Venezuela data are complete (both goods and services), the Russia data does not include services data because that data is not readily available.

These authoritarian regimes run huge trade surpluses with the United States partly by suppressing their own people's current consumption and then using the resultant savings to buy foreign financial assets. This economic strategy is called mercantilism. It only works when the authoritarian countries' trading partners tolerate trade imbalances.

If the United States were to insist upon balanced trade, the economic growth of these repressive regimes would slow, and American economic growth would speed up. We could place a WTO-legal scaled tariff upon our imports from trade surplus countries. Such a tariff would take in half of our trade deficit with each country as revenue. The duty rate would go down as trade moves to balance.

Currently America's free trade policy is contributing to the increase in worldwide authoritarianism. If America were to switch to a balanced-trade policy, the new policy could promote worldwide democracy.

At the end of the movie Casablanca, Rick (Humphrey Bogart) shoots Nazi Major Strasser so that Ilsa (Ingrid Bergman) can escape. Although French Police Chief Renault had just witnessed the shooting, when his men arrive he tells them, "Round up the usual suspects."

Life sometimes imitates cinema. China just rounded up the usual suspects. Their crackdown on copyright crimes is timed for President Hu's visit to the United States from January 18-21. AsiaOne reports (China detains 4,000 people in copyright crackdown):

BEIJING, CHINA - China has detained more than 4,000 people suspected of violating intellectual property rights since November and will toughen punishment to tackle the rampant crime, an official said Tuesday....

The number of arrests, cases and value of infringements were three times higher than the same period a year earlier, Gao said, according to a transcript posted on the official website China.com.cn.

Wow! The number of arrests is three times higher than last year's roundup! According to ip-sharing.com:

Beijing has launched repeated crackdowns and boosted penalties in the past, but foreign governments and trade groups say its enforcement remains unsatisfactory because it has not been strict enough. In particular, in its WTO complaint, the US complained about prosecution thresholds in Chinese law that allow violators to escape punishment if they make less than 500 copies of an item. It also accused Beijing of violating trade rules by turning a blind eye to the piracy of CDs and DVDs that haven't been passed by state censors....

The 2010 National Trade Estimate published by the office of the United States Trade Representative makes it clear that the United States is aware of China's strategy. China delays sales of the legitimate items while allowing this piracy of U.S. CDs and DVDs. The relevant section of that report begins:

In addition to censorship reviews by Chinese authorities, which can delay the arrival of imported foreign films on Chinese movie screens, the Chinese government has historically decreed “black-out periods” during which no new revenue-sharing blockbuster foreign films may be released in order to prevent competition with Chinese films being released during the same period. Banning the release of new foreign titles or removing popular foreign films during peak seasons not only hurts theatrical revenues but also contributes to increased piracy, as pirates meet immediate consumer demand for foreign titles by offering illegal downloads through the Internet, on pirate optical discs, and pirate video-on-demand channels. (p. 22)

When Presidents Obama and Hu meet in Washington next week, President Obama should tell President Hu that trade between the two countries had better move rapidly toward balance, or he will impose tariffs to force it into balance. The ideal tariff would be a scaled tariff whose duty would take in 50% of our trade deficit with China. The duty rate would go down as China takes down its tariff, non-tariff, and currency-manipulation barriers to U.S. products.

President Obama must choose between pretend free trade and balanced trade. If he chooses pretend free trade, he will be able to watch a pirated-version of Casablanca in his hotel room next time he goes to China. If he chooses balanced trade, he will revive the American economy.