October 28, 2004

Fear-Mongering On The Trade Imbalance

This is about as fashionable in politics as a confederate flag bumper sticker on a dingy yellow pickup, but it annoys me because people still like to reference it sometimes. So here's my take on it.

The trade imbalance is a manipulated political issue, the same with the people who desperately want a high dollar. We have a trade imbalance because they have stuff we want and we give them money to buy it. The deficit will level off as their standard of living rises with the influx of massive amounts of Western cash and they can actually afford the expensive-ass stuff we're selling. We have gobs of money so we can afford to buy all the cheap trinkets and pieces of plastic that factories in China and Indonesia sell. They don't have gobs of money lying around so they can't afford the stuff Americans sell.

Additionally, their factories are specifically targeted at selling us stuff, but nobody sells to poor-ass Asians because they don't buy enough yet; as China becomes a more and more attractive consumer market, we'll start targeting them for car, electronics and consumer goods sales and the trade deficit will level off - but in essence they're TRYING to sell us stuff and we're NOT trying to sell them stuff. Naturally that means a deficit in their 'favor.'

We have to realize that it would cost a lot to set up shipping routes to China and elsewhere. To do that, you'd want to be reasonably sure that you could sell what you send there and turn a profit at the end. Since there are millions of rich, luxury-purchasing consumers in the US, a favorable political environment for business and substantial legal protections for commerce, it's very attractive to do business here. So naturally Chinese AND US companies want to sell stuff here, if they possibly can turn a profit. Comparatively, the market -though enormous- is broadly impoverished in China, the political environment is less predictable, and the Chinese protections for commerce are based on short-term interest and not matters of settled, historic law. It's less attractive to sell to poorer people farther away in a country that's less safe for commercial interests.

Those are some of the major reasons we have an imbalance.

The best way to stop a trade deficit is to allow the dollar to devalue. Relative to Chinese or European currencies, a devalued dollar makes it harder for Americans to buy goods from non-$US countries and easier for non-$US to buy from us, owing in essence to exchange rates. Unfortunately, it's often the same people who gain some supremely shallow nationalistic pleasure from the idea of a trade surplus and a strong dollar. That's possible to have both, but unlikely the way things are right now.

If you really want to cut the trade deficit down, you need to devalue the dollar.

We shouldn't act on the trade deficit, it's a normal economic process so long as the government isn't artificially encouraging it. We should focus on balancing the budget and keeping interest rates low to help the economy, not on manufactured emotionalism like the trade deficit.


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