George P. Schultz and Martin Feldstein’s Washington Post op-ed on trade is so short you should read it in full:
If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic.
If we manage to negotiate a reduction in the Chinese trade surplus with the United States, we will have an increased trade deficit with some other country.
Federal deficit spending, a massive and continuing act of dissaving, is the culprit. Control that spending and you will control trade deficits.
The first sentence is axiomatic; it’s a tautology—true by definition. The third sentence combines tautology with hypothesis. Its truth really depends on circumstances.
I believe the fourth sentence is only true if you make certain assumptions, for example, that we must allow the Chinese to purchase and hold Treasuries with the dollars they receive in trade. That is not true. We could and IMO should force them to hold dollars.
I think we have a trade deficit with China for four reasons:
- The cost of labor in China is very low.
- In the 1990s the Chinese maintained an artificially low yuan in a deliberate move to siphon away U. S. productive capacity. That has had lingering consequences.
- The Chinese hold Treasuries rather than purchasing American goods and services, we allow them to, and they can enforce it in China because they’re still an authoritarian country.
- There’s an uneven playing field. Chinese goods are produced under conditions we consider abusive to workers, without the environmental, safety, human rights, and other protections enforced here. We could and should impose a Pigouvian tax on goods made in China to account for the factors we allegedly believe in.
Change those factors and the balance of trade between the U. S. and China will change, too.
“tl;dr” is Internet slang for “too long; didn’t read”. My “ss;mr” is the opposite of that—”so short; must read”.
They’ve got the causation in their fourth sentence backward. We have a large budget deficit because we have large trade deficits. The dollars accumulating in foreign central bank accounts have to be replaced by someone, and that someone is the party with the printing press.
I was confident I could trust you to point that out. 😉
However, as I point out there is another alternative: we could give the Chinese incentives to buy American goods and services rather than Treasuries. If the Chinese were buying American agricultural products, farming equipment, etc. rather than maintaining their present part-autarky, it would solve many of our problems.
The Chinese aren’t the only culprits: we have the same problem with the Japanese, the South Koreans, Ireland, Brazil, and Switzerland, just to name a few.
We could just increase what we produce, but apparently, that is not possible. I am interested in this Law of a Permanent Trade Deficit and the mechanics behind it.
Rather than using cheap foreign labor, we could use cheap mechanical labor and automation. Cheap robots beat cheap humans. Throughout human history, this has been true, but with our advances in technology, manual labor is prefered to mechanization and automation.
It’s not that we don’t or can’t produce enough. It’s that the Chinese, Vietnamese, etc. are able to undercut the prices at which U. S.-produced goods can be sold at a profit.
However, you’re right in that China is fighting a battle against time. When additive manufacturing picks up steam, cost of transportation will be a more important consideration than labor costs and they’ll be back where they started. Which is why they need to build their domestic market rather than predating on ours.