Consider the chart above. Note that our balance of trade with many if not most of our trading partners isn’t horrendously lopsided. Except one. Now read this report from the Wall Street Journal:
The U.S. logged a $502.25 billion trade deficit in 2016, the largest in four years and a gap President Donald Trump is setting out to narrow to bolster the U.S. economy.
The new president faces obstacles in the coming months and years, including the potential for a stronger dollar, larger federal budget deficits and low national saving rates compared with much of the rest of the world, all of which could force trade deficits to widen.
As in past years, the 2016 gap reported Tuesday by the Commerce Department reflected a large deficit for U.S. trade in goods with other countries, offset in part by a trade surplus for services. The gap in terms of goods only was $347 billion with China last year, $69 billion with Japan, $65 billion with Germany and $63 billion with Mexico.
For December, the total trade gap decreased 3.2% from November to a seasonally adjusted $44.26 billion. Exports rose 2.7%, including increased sales of civilian airplanes and aircraft engines. Imports were up 1.5% in December, including a rise in car imports.
The huge trade deficit we run with China isn’t because we don’t produce anything that the Chinese want. We do. It has several causes: 1) China needs dollars to purchase oil with; 2) China uses the excess dollars it receives in trade to purchase Treasuries rather than goods or services; 3) China intervenes actively to prevent the importation of more of the stuff that we produce.
We have enormous unused capacity here in the United States, particularly in primary commodities. We could be producing lots more rice, wheat, chicken, pork, coal, iron ore, and so on and so on—all things the Chinese need. And producing more of those things would create lots of jobs that ordinary people could perform.
Why do we tolerate China’s mercantilist strategy?
Why do we still tolerate it, or why have we tolerated it? I suspect the answer to the second question is: because we saw a greater good in a complete Chinese buy-in to the world economic system. We shrugged because they are a huge potential market and the more connected they are to us, to Japan, to South Korea, the less trouble we’ll have with them. We want a big, strong, rich China because that situation is more stable and profitable than a backward-looking China.
We’ve done very well encouraging former foes to join the money-grubbers club – Japan, Germany and now China. The failure has been Russia.
Easy to talk about a grand “world economic system” constructed by the US at the expense of our own working class.
Easy if you’re not particularly patriotic in the truest meaning of the word.
The problem is that China never did that. 45 years after rapprochement, 35 years after GÇŽigé kÄifà ng, it’s still largely a one-way autarky. 20 years later, its banking system is still nearly completely opaque in contradiction of commitments they made in joining the WTO.
Not only is China’s progress in its “buy-in to the world economic system” not progressing quickly enough, it’s actually going in reverse.
While 45 years may not be a long time in the lives of nations, it’s nearly two generations in American lives. If there’s going to be shared sacrifice in the pursuit of global integration, there needs to be much, much more sharing.
The Chinese buy-in has been into the US financial system. Living a middle income lifestyle while working a low income job is a problem, but it is nothing that a little low cost debt cannot fix.
Even credit backed dollars cannot be “printed out of thin air”. There are still capital requirements. Has anybody thought about how a housing bubble is created? It does not just leap out of the forehead of a Wall Street banker, full-grown.
Because all public US financial balance sheets are interconnected through the Fed, pouring money into the shallow end of the money pool affects the deep end as well.
Dave:
Oh, I think we are in violent agreement on that. We put in place indulgent policies on the theory (probably correct) that stability is job #1, and stability comes from a middle class. But as with all institutional mindsets there’s no sunset provision. And there’s no establishing of quid pro quo. Yes, we’ll help you economy along, but then. . . we never have the then. No tic toc.
This is where the math comes in. You could tax the top 1% of income earners at 100% and still not make up for the loss of income that the loss of jobs caused by present policies has produced.
We tolerate it because the experts and the establishment keep telling us we benefit from it.
The answer to the question is this is a factor why we have President Trump instead of President Clinton.
This article by Michael Pettis on trade deficits and its effect on the US economy is very illuminating, if a bit advanced. http://carnegieendowment.org/chinafinancialmarkets/67867
Why this source of authority, despite being pretty harsh on the regime, the Chinese government continues to let him teach in Tsinghua. He pretty much predicted how the Chinese economy would slow down as it has 5 years ago.
In the link above these paragraphs should be carefully digested:
There is clear evidence that real domestic BI is not increasing, that we have both under-employment and unemployment, that U. S. productivity is not increasing and that debt is increasing.
Here’s another significant passage:
which is why I think that, as a means of increasing domestic investment, reductions in the personal income tax rate are frivolous. There’s no evidence that desired investment is lower than actual investment.
In support of Dr. Pettis’s criticism of this claim:
consider rare earth metals. The U. S. went from being the leading producer of rare earth metals to being an importer of rare earth metals, not because we ran out or even solely because of Chinese cost advantage. It was a political decision.
The only criticism I have of Dr. Pettis’s article is that it only works in aggregates. It doesn’t treat the decline of U. S. manufacturing or primary commodity production relative to increases in healthcare, education, etc.
“The U. S. went from being the leading producer of rare earth metals to being an importer of rare earth metals, not because we ran out or even solely because of Chinese cost advantage. It was a political decision.”
Heed this, people. Sometimes there is much to much theory and what not discussed here.