Much had been said about trade deficit between USA and China. The crux of the argument is always that USA has been running a huge trade deficit against China over the recent years that this has becoming a problem. The fact that this has bothered some people is not manifested in visible impact on losing jobs but in perception of the reality. It is true that free trade always can trigger some job loss in certain industries. This is just how international trade helps the world to reorganize the capital and raw resources to produce goods and services more efficiently. Just as USA has lost some manufacturing jobs due to trade with China, India, Mexico, Canada, Japan, and the rest of the world, at the same time, trade has brought new jobs to the USA in the areas such as aerospace, electronics, entertainment, agriculture, and finances. So, it is wrong to say that free trade hurts middle class Americans as the increasingly annoying Lou Dobbs claims. If free trade hurts middle class Americans, then what about the jobs that are created by free trade. Are some jobs more important than the others? True that it is always painful to lose jobs but that is not the fault of the free trade. The society moves forward in the a market economy where the more efficient and more productive jobs are introduced while the less efficient and less productive jobs are either removed or transferred to low cost areas. That is just how the free market works.
So what about the trade deficit? USA has a huge trade deficit. That is not just against China but to the rest of the world. Mainland China while ran a trade surplus against US, also ran large and sustained deficit against Taiwan, sometimes with Korea and Japan. This is explained by the fact that mainland China has a large number of assembly plants that make final products out of parts made in Taiwan, Korea, and Japan. The end result is that the deficit that USA has with mainland China is partly transferred to these three areas. Another source of trade deficit is caused by European and American’s direct investment in mainland China to produce goods sold in the US market. Even though mainland China has trade surplus on paper, the actual profit from the trade goes directly to these companies based in USA and Europe. So there is a danger to actually hurt US economy if the US government creates trade barriers to curtail trade with China.
If you look at the trade statistics between USA and China over the years, you will see that both import and export are growing at rapid pace. The trade imbalance is obvious: the import/export with China is 65,238 / 321,507 million in 2007 while 55,185 / 287,774 million in 2006. So, why the huge imbalance. Back in 1985, the import/export with China was 3,855 / 3,861million. The import and export figures were pretty close. The import from China has exploded over the past 20 years while the export to China has grown at a rapid pace but just cannot catch up with the growth of import. So whose fault is it? One must answer this complex question from many different angles. I don’t pretend that I know all the answers but I will list a few that I think are reasonable.
1. The China’s domestic market is small compared to the US market. It is always easier to sell goods and services to the bigger market. As China’s economy grows, the consumption power of the Chinese grows as well, which means that more US products can be exported to the Chinese market. So I am optimistic that the trade imbalance between USA and China will improve over the years. The trade deficit will not accelerate indefinitely. I am not saying that the deficit will stop growing. It will simply slow down to a point that it might actually shrink.
2. As the US dollar continues its current pace of depreciation, the US made products will become more competitive and of course more exports are likely to the Chinese market and to the rest of world as well. There is a huge debate as to whether China has manipulated its currency to artificially depress the exchange rate of Yuan against the dollar. One must realize that it is actually very difficult to fix exchange rate for a country like China because the scale of the international trade. In order to artificially fix exchange rate, the Chinese currency authority has to absorb all the extra dollars that people want to sell and give them the Chinese Yuan instead. This creates a inflationary pressure to the Chinese economy as more Yuan is printed to meet the demand while the Chinese authority is holding huge amount of dollar-based assets with very low yield. So eventually this has to stop. China has to let the Yuan to appreciate against dollar and this is happening. As of today, one US dollar can buy less than 7 Yuan. It appears that the US dollar is depreciating against the world currencies, especially the Euros. So the exchange rate changes between Yuan and dollar is not a special case but part of a general trend. Unlikely the trade deficit between China and US is the main reason.
3. Though China’s market is relatively small, it has huge appetite for capital goods such as equipments for manufacturing machineries and electronics. China buys equipments to increase her capacity in the manufacturing, agriculture, and high tech sectors. However, the USA and the rest of the developed world impose trade embargo against China to stop shipment of any products that are deemed sensitive to military use. One can say that military use of equipment is highly specialized so that this won’t impact exports to China a great deal. This is not true. In fact, many equipments have dual purposes. Also, majority of equipments contain technical aspects that can be interpreted as military grade. The very government agencies that regulate trade sanctions against China do not have all the tools and knowledge to determine what can and cannot be sold to China. As a result, companies and traders are reluctant to sell products to China if there is perceived danger that such trade might be interfered with by the US authorities. Such is very foolish of the US government but the government has done many foolish things in the past. This one is no exception. So it is the US government that is hurting the US businesses in expanding their market and creating jobs. The US government can’t tell the public that trade deficit is caused by its misguided policies. So it invented numerous excuses to either explain away the deficit by blaming it on exchange rate or incites fear among the public to Chinese products by exaggerating product defects to install non-tariff trade barriers. Of course the latter approach would eventually backfire because unhealthy fear among the public can only distort the consumption pattern and also trade barriers can trigger trade retaliation. Trade has two sides. If USA takes aggressive actions to harm import, its export suffers as well.
4. Made in USA doesn’t imply good quality. Many Americans want to believe that US made products are good while made in China is bad. This is not true in general while definitely not true when comparing US made products with the ones made in Japan or made in Germany. In fact, for a period of time, US made products are expensive and have bad quality. Fortunately, USA being the most innovative country can always generate newer products and services to grow the economy. But very quickly, the new ideas and innovations become matured products that are made in low cost areas overseas. This is not the fault of the free trade. This simply means that the US workers are not productive enough to make the goods with high quality, low costs so that they are competitive.
So next time when you want to boycott Chinese products, please think (1) whether the products are actually sold by a US company which might employ your friends or relatives (2) when you are doing this, could the Chinese boycott the stuff you make as well (3) if you don’t buy this, will you buy the more expensive and crappy US made products.
Yeah, you can always buy the same products from Vietnam, India, or other south east Asian countries too. But it is very likely that they are made by factories owned by ethnic Chinese too. I am saying this to those closet racists out there.
Finally, if you want to trade with Japan and Germany which are two countries that US still occupies, that is fine too. Just remember these two countries actually make their products in lower costs countries like China and Mexico. Of course, the racists don’t like Mexicans very much either.