Unfair Trade

Another random observation. The underlying problem with our foreign trade isn’t whether or how much other countries subsidize their exporters. It’s that we finance our government by selling bonds. There are multiple ways of not doing that but as long as we continue doing it we’re going to have a trade imbalance whether other countries subsidize their exports or not.

4 comments… add one
  • Drew Link


  • Ben Wolf Link

    @Dave Schuler

    Could you elaborate on the selling of Treasurys being tied to the trade deficit?

  • It’s a story I’m sure you already know very well, Ben. When we purchase Chinese goods we do so with dollars. The Chinese companies from which we purchase goods exchange their dollars for yuan with the Chinese government-owned banks, the only outlet for them they can use. The Chinese government exchanges the dollars for yuan, controlling the rate of exchange.

    The state-owned banks historically have used the dollars to buy Treasuries on which we, in effect, pay interest. The net result is that more of the benefits of trade accrue to the U. S. government than would otherwise be the case. At the very least the amounts involved are in the hundreds of billions.

    It doesn’t have to be that way. If there were no Treasuries to buy the Chinese would have two alternatives. For example, they could just let the dollars sit there, gathering electronic dust in a computerized ledger. We’d be merrily inflating the value of those dollars away so that every day the deal the Chinese authorities cut would be worse.

    Alternatively, the Chinese could use those dollars to purchase American-made goods. That would (by definition) increase the demand for those goods, more goods would be produced, and more Americans would be employed making those goods.

    What the Romney campaign has wrong in their position on trade (among other things) is that it’s not just the Chinese who are playing this game. It’s the Chinese and the Japanese and the Thais and the Filipinos and the South Koreans and the Vietnamese and …

    The linchpin of this arrangement which effectively works as a siphon pumping away American jobs is our reliance on Treasuries for financing the government. This is done largely by force of habit.

  • Ben Wolf Link

    I think you’re completely right. One of the problems with the current system is that the only choice the Chinese have is to buy Treasurys. Congress won’t let them buy any assets of consequence in the U.S. They use dollars to buy things like oil, and other commodities no one wants yuan for, but in the end they’re building up more currency than they can use, at least in the near future.

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