Monday, February 13, 2012

Why China trade is bad for America

I've argued for a while that free trade with China has been a disaster for the US.  The US has been running massive trade deficits with China for years. We are told that Americans need to work harder or study more to improve our competitiveness. We are told that China's trade surplus is due to very low wages, and that low skilled jobs will inevitably move there. We are told that globalization is inevitable.

What the defenders of free trade miss is that US - China trade is abnormally unbalanced. For 2011 the ratio of imports from China to exports to China was 3.8:1  I don't believe this is the result of lazy American workers or cheap Chinese wages. The charts below cover countries which account for 78% of US imports.  Many of our trade relationships are reasonably close to balance, but something is very wrong with China and Russia. They simply don't buy American goods. These are both former centrally planned economies, and I believe their trade surpluses are the result of deliberate government policy.

Some people claim that China's surpluses are the result of low wages. However, India also has very low wages, and our trade with the Indians is far more balanced.

When I started this, I thought that Venezuela and Saudi Arabia's surpluses were simply the result of high oil prices. Oil prices have risen enormously in the past ten years, so I thought that if I went back to 2001 I would find that Venezuela and Saudi were running trade deficits with the US. Here is the same chart with 2001 data.

That's odd! Venezuela and Saudi Arabia were running trade surpluses with the US even when oil prices were far lower.  Most of export ratios don't seem to have changed very much. Brazil was still the only country with which we had a trade surplus, and China was still dreadful. What happens if I go back another ten years to 1991?

Well, the data series for Russia and the European Union don't go back that far. The other ratios have changed far less than I would have expected. Canada, Mexico, Brazil and South Korea have all kept their trade with the US close to balance.  China was a dreadful trade partner 20 years ago, and that hasn't changed even as the volume of trade has swelled 20-fold.

I personally find it very surprising that the ratio of imports to exports for most countries has stayed relatively constant  over the past 20 years even though the volume of trade has expanded enormously. My economics textbook says that imbalances in trade should be corrected by shifts in exchange rates. The surplus country's currency is supposed to rise, making its exports more expensive and eliminating its trade surplus. Unfortunately for my textbook, this never seems to happen in the real world.

What if textbook economics is wrong? A trade deficit has to be financed by borrowing.  If it goes on long enough, debt levels will eventually become unsustainable and a massive financial crisis will result. This is what has happened to Greece.  Will the same thing eventually happen to America?


China and Russia's trade surpluses with the US in 2011 are so far out of balance that I think they must be the result of deliberate government planning. Both are former Communist economies and I think that enough of the old central planning machinery has survived to allow both nations to 'manage' their trade with the US. Manipulation of their currency is a key element of this. Introducing a broad based tariff on all of their exports is the only way for the US to restore balanced trade.

However I also fear that our modern system of globalisation and free trade may contain the seeds of its own destruction. Trade imbalances seem to be baked into the structure of the global economy. They don't seem to correct in the way that economists say they should. In the long run a widespread abandonment of free trade might be necessary to avoid a global debt crisis.

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