U.S. Trade with China: Economic Suicide

Returning to my alphabetical analysis of results between the U.S. and its major trading partners (after jumping ahead to Mexico to complete an analysis of NAFTA), China is next on the list.  Because our trade deficit with China now accounts for over a third of the total U.S. trade deficit (and over half of our trade deficit in manufactured goods), trade with China dominates virtually every discussion of U.S. trade policy.  The following is a graphical presentation of our balance of trade with China, broken down into several major categories:

trade-with-china

sources:  http://www.census.gov/foreign-trade/statistics/product/enduse/imports/c5700.html

http://www.census.gov/foreign-trade/statistics/product/enduse/exports/c5700.html

Unlike the nations we’ve examined in previous articles, where there is lively trade in both natural resources and manufactured products, trade with China is all about manufacturing and is almost completely one-sided.  In 2008, we imported $324 billion worth of manufactured goods while only exporting $49 billion.  On average, container ships return home to China from America only 15% full. 

These results are exactly what the theory explained in Five Short Blasts, would predict.  With per capita consumption badly stunted by over-crowding, China comes to the trade table with nothing but an enormous labor force, hungry for American jobs, while offering nothing in return.  There is no equivalent market there and little opportunity for American exporters. 

Everyone blames China – for manipulating their currency, for trampling intellectual property rights, or for their lack of labor and environmental standards.  But when our trade results with China are put into proper perspective – by translating them into per capita terms – we find that our per capita trade deficit in manufactured goods is quite unremarkable at $206.54.  Our per capita trade deficit in manufactured goods with many other overpopulated nations – including Japan, Korea, Mexico and many European nations – is worse and, in some cases, much worse.  China isn’t the problem.  Our trade results with China are exactly what we should have expected when we applied the same trade policy that was a proven failure with other overpopulated nations to one with a fifth of the world’s population.  The problem is our own trade policy, which fails to account for the dominant role of population density in distorting global trade in manufactured goods in favor of overpopulated nations. 

The Obama administration seems to be  relying on “fair trade” tactics to restore a balance of trade with China – which includes labeling them as currency manipulators and negotiating with them to enact labor and environmental standards.  Thirty-three years of consecutive and ever-growing trade deficits have proven this approach to be a complete failure.  Trying harder won’t yield any different results.  There is only one way to restore a balance of trade with China – by implementing tariffs.  As is the case with Mexico, tariffs on Chinese products should consist of two components:  a permanent tariff indexed to their population density to compensate for their low per capita consumption, and a second tariff that could gradually be eliminated if China enacted labor and environmental standards equivalent to those in the U.S.

Free traders will howl “protectionism” and warn of a trade war.  I have news for them:  we’re already in a trade war and are being annihilated because we haven’t had the guts or common sense to even put up a fight.  Say what you will about the benefits of trade, and there are many.  But no one can make a case that there are any benefits at all associated with a huge and persistent trade deficit.  It is this trade imbalance that has collapsed our economy.  Sure, China may retaliate with tariffs of their own, but they would be completely ineffective, since our exports to China are minimal.  Other nations, like those we examined in previous articles (Australia, Brazil and Canada) would certainly not side with the Chinese.  If anything, they’d adopt our own trade policies to protect themselves as well. 

Long term, China has only one reasonable option if it wants a high standard of living for all its people, and that’s reducing it’s population to a level where over-crowding is no longer a constraint on per capita consumption.  Until that happens, free trade with China will always be tantamount to economic suicide.

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