China’s Trade Surplus with U.S. is Secure

http://www.usatoday.com/money/world/2010-04-03-china-currency-report_N.htm

The above-linked USAToday article reports on the Obama administration’s decision to delay labeling China a “currency manipulator” which, under World Trade Organization rules, would leave the U.S. free to impose tariffs on Chinese imports.

China has nothing to fear from the Obama administration.  Its trade surplus with the U.S. is secure and likely to grow.  Obama has, time and again, in spite of his campaign promises to enforce trade deals and bring manufacturing jobs back home, proven himself unwilling to take action on trade policy.  He still has done nothing in response to large and wide-ranging tariffs raised by Mexico early in his administration.  He has never uttered a peep of protest about blatant dumping by Japanese automakers.  And, while his administration has done some timid peeping about Chinese currency manipulation, he has once again proven unwilling to act. 

Besides, even on the outside chance that he did slap the “currency manipulator” label on China, it would lead to nothing but years of more talk.  And even on the outside chance that China did agree to let its currency float and be determined by market forces, it would have no impact on the balance of trade.  

Still, Geithner said in a statement that China should adopt “a more market-oriented exchange rate” to balance the U.S. trade deficit with China, which totaled $226.8 billion last year — the largest imbalance with any country. U.S. manufacturers say China’s yuan is undervalued by as much as 40% and is a big reason for the massive trade deficit.

Wrong.  Currency valuations have nothing to do with this trade deficit with China nor with any trade deficit.   Trade imbalances are driven by imbalances in labor capacity.  Excess labor capacity in densely populated nations is driven by their low per capita consumption, eroded by overcrowding.  Thus, it is ultimately a disparity in population density that drives global trade imbalances. 

If “currency manipulation” is the cause of the U.S. trade deficit with China, then how does one explain an even larger U.S. trade deficit (in per capita terms) with the Euro zone, a region almost as densely populated as China?  How does one explain the far larger trade deficit with Japan (in per capita terms), a nation  ten times as densely populated as the U.S.?  And how does one explain the fact that, in spite of the dollar falling by over 300% vs. the yen in the past four decades, our trade deficit with Japan, instead of falling, actually exploded?  The reason is because currency valuations, if allowed to be determined by market forces, actually stabilize at a level where unemployment is evenly distributed, and not at a level where trade is balanced. 

A stronger yuan versus the dollar would make U.S. products less expensive in China, while making Chinese goods more expensive for American consumers.

Sure, but that doesn’t mean it will have any effect on trade.  China will maintain their market share by taking less profit and by finding other ways to subsidize their manufacturers, just as Japan and Europe have done for decades.   

The administration is hoping that China will again allow its currency to rise in value against the dollar as a way of narrowing the trade gap — as it did until mid-2008 when the global recession began to cut sharply into China’s exports abroad.

 And what was the result of China allowing the yuan to appreciate by 20% during that time frame?  The U.S. trade deficit with China worsened. 

The article goes on to present the pros and cons of tough trade action on China, weighing help for American workers against Chinese cooperation on the Iran nuclear issue, and so on.  It’s clear that there will always be a reason for the U.S. to be the world’s doormat when it comes to trade policy.  American jobs are always the first concession made for international cooperation on one thing or another. 

No, China has nothing to fear.

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7 Responses to China’s Trade Surplus with U.S. is Secure

  1. Mark Hall says:

    SAD! SAD! SAD!

    Apparently, when it comes to confronting China and illegal migrants on the behalf of Middle America & floundering state and local governments our federal government has determined that “FAILURE” is the easier and therefore the selected option.

    WE HAVE NOW REACHED THE POINT OF NO RETURN!!!

    Just think, it has taken only 15 years to destroy a country which took 200 years to build and millions of lives to defend.

    AN As,

  2. Mark Hall says:

    Should we expect anything different from an administration that thinks 5+ years for a “possible” full recovery is ACCEPTABLE!

  3. mtnmike says:

    “Show me a five year plan and I’ll show you a plan that won’t work.” — “Chainsaw” Al Dunlap, American corporate turnaround expert.

    I suppose it’s easy to talk about currency values as the problem when most Americans are clueless on that front. However currency values can never be the same between countries that have wage and quality of life disparities to the degree that exists between ourselves and China.

    Therefore, the key is then to drag Middle America down to the same level as our free trade/fair trade competitors while our leadership lives in the lap of luxury.

    There are volumes written on this subject in history books from around the world. We don’t read; we watch television.

  4. krissnp says:

    Distorting economy will continue to mean politics in the near future too.

  5. Dave says:

    Based upon what you wrote “Thus, it is ultimately a disparity in population density that drives global trade imbalances” I was thinking and then checked the figures and our number two source for our trade deficit is Canada at 70 bil. How is this possible? Considering Canada does not have a high population density and is in fact lower than ours. Even if one takes away the inhospitable tundra areas as living space Canadians seem to have plenty of room.

    Now I think you’re on to something with your theory but I don’t believe population density is the answer to every economic question. This is a very complicated world and while I think your theory is a sorely needed missing piece of the puzzle, there are other factors at work. One factor you don’t touch upon is the possibility that Global Corporations are actually benefitting from the current situation. What seems like the Government implementing policies against our best interest are actually in the best interest of the top 1% and for global corporate profits. How else can you explain the fact that median income is flat while the GDP has been soaring since 1965? As for legal and illegal immigration, who besides the immigrants benefit from this? I believe the only solution campaign funds from taxes to truly take our country back and give it to all 100% of us.

    As for your thoughts on high population densities, I don’t think high density is always a recipe for utter misery. Cities tend to have high densities and guess what before median wages stagnated in the late 60’s the population densities in our cities were higher. Folks had less square footage in their houses and based on my memories from the early seventies folks were just as happy. I think what you are missing is that there is a fuzzy comfort area between sprawling car centric American megacities like Atlanta and high density hell holes like Manila. Also there are many high density locations here in the U.S. that find ways to spend there money. My friends in San Francisco have no car but they make up for that by spending much money on nice restaurants and lots of trips. As for smaller living spaces in big cities, this is supply and demand. If you live in a desirable location you have to spend the bucks. My friends in CA could move where I am in rural Virginia and live in a mansion but they don’t because the location isn’t desirable to them and this is apparently the same with a lot of other folks.

    Well I was critical of some of your views but I still think your theory has great merit and I enjoy your blog and will buy your book.

    • Pete Murphy says:

      Dave, I should have been more explicit in stating that it is population density disparities that drives global imbalances in the trade of manufactured products. The huge trade deficit with Canada is all oil and gas. We actually have a small surplus of trade in manufactured products with Canada, just as my theory would predict.

      You make a great observation about corporations. One of the consequences of breaching a critical population density that I discuss in my book is a divergence of interests between the common good and those who benefit from population growth. Once a critical population density is breached, although per capita consumption goes into decline, driving up unemployment, total consumption still rises. Thus, it’s in the best interest of corporations to see population growth continue forever, while it’s in the best interest of the common good that the population be stabilized, to avoid high unemployment and a downward pressure on wages.

      As for your last paragraph, my theory does not deal with the population density of cities vs. rural areas. Rather, it deals with the population density of entire countries. This is because both cities and rural areas are necessary components of a viable economy.

      Great observations, Dave. Thanks for stopping by.

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