Trade Deficit with China Hits Record in 2011 in Spite of Rising Yuan and Chinese Incomes

Our economists and political leaders say that the weak Chinese yuan, held at an artificially low level by China, is to blame for our trade deficit with China.  They also say that trade deficits are caused by low wages. 

The yuan ended 2011 at 6.45 to the dollar, rising 5% in 2011 and 22% since 2005.  And incomes in China have risen by 115% since 2001 to $8,400 per person.  That’s not high relative to American incomes, but it’s high enough to place China in the top 50% of nations ranked according to income. 

So in 2011 we should have seen some decline in our trade deficit with China, or at least signs that it was beginning to level off.  Right?  Well, not only did it not decline, there is no sign of it leveling off, either.  In fact, our trade deficit with China grew to a new record of $295.5 billion in 2011, blowing past the previous record set just last year by another $22 billion.  And the trade deficit in manufactured products soared to almost $322 billion.  Here’s a chart of our balance of trade with China since 2001:

China Trade

As you can see, there has been no slow-down in the growth of our trade deficit with China whatsoever.  (There was only a tiny dip in 2009 when all global trade slowed dramatically during the recession.)  How can this be?  If economists are right, with the Chinese yuan on the rise and with Chinese incomes growing dramatically, we should at least see some effect.  But there is absolutely none.

That’s because currency exchange rates have absolutely nothing to do with trade imbalances.  The only thing a rising yuan will do is make the Chinese cut costs and become more productive in order to hang onto their market share.  A leaner, more productive Chinese work force is the last thing we need to help cut our trade deficit with them. 

And while there is a relationship between incomes and balance of trade, it’s exactly the opposite of what economists have maintained, which they’d soon discover if they put a little effort into gathering actual data.  In trade with nations much more densely populated than the U.S., low incomes correlate to small imbalances of trade (including surpluses!), while high incomes correlate with high U.S. trade deficits.  That’s because it’s through exports to the U.S. that the people of badly overpopulated nations are able to raise their incomes.  It’s the very reason that, in per capita terms, our trade deficits with wealthy nations like Japan and Germany are far worse than our trade deficit with China.  Take away free trade and their huge trade surpluses with the U.S. and their incomes would decline and their unemployment would rise precipitously. 

The data is clear that trade imbalances are caused by disparities in population density which cause disparities in per capita consumption.  We have trade deficits with badly overpopulated nations not because of currency exchange rates, low incomes or a lack of competitiveness.  We have trade deficits because they consume too little while being just as productive as we are.  The only way to restore a balance of trade with such badly overpopulated nations is through the use of tariffs. 

In all likelihood, our trade deficit with China will level off in the next few years, not because of a rising yuan or rising Chinese incomes, and certainly not because of any intelligent U.S. trade policy moves, but because there’s little manufacturing left in the U.S. to cannibalize.

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