Monday, July 11, 2005


Drudge has a huge headline: "CHINA TRADE BLOWOUT; EXPORTS 5x A YEAR AGO!" and links to this "Reuters" article:

It's the latter - according to economist WALTER WILLIAMS. I report, you decide:
I buy more from my grocer than he buys from me, and I bet it's the same with you and your grocer.

That means we have a trade deficit with our grocers.

Does our perpetual grocer trade deficit portend doom?

If we heeded some pundits and politicians who are talking about our national trade deficit, we might think so. But do we have a trade deficit in the first place? Let's look at it.

Insofar as the grocer example, there are two accounts that I hold. One is my "goods" account, which consists of groceries. The other is my "capital" account, which consists of money. Let's look at what happens when I purchase groceries. Say I purchase $100 worth of groceries. The value of my goods account rises by $100. That rise is matched by an equal $100 decline in my capital account. Adding a plus $100 to a minus $100 yields a perfect trade balance. That transaction, from my grocer's point of view, results in his goods account falling by $100, but when he accepts my cash, his capital account rises by $100, again a trade balance.

The principle here differs not one iota if my grocer was located in another country as opposed to down the street. There'd still be a trade balance when both the goods account and the capital account are considered.

Imbalances in goods accounts are all over the place. For example, my grocer buys more from his wholesaler than his wholesaler buys from him.

The wholesaler buys more from the manufacturer than the manufacturer buys from him, but when we put capital accounts into the mix, in each case, trade is balanced.

International trade operates under the identical principle.

When we as consumers purchase goods from China, and the Chinese don't purchase a like amount of goods from us, it is said that there's a trade deficit.

But instead of purchasing goods, the Chinese might purchase corporate stocks, bonds or U.S. Treasury debt instruments.

Just as in my grocer example, there is a balance of trade. The deficit in our nation's goods and services account, sometimes called current account, is matched by a surplus of equal magnitude in our capital account.

A large portion of surpluses in our capital account consists of U.S. Treasury debt instruments held by foreigners. As of June 2004, China held nearly $200 billion, Japan over $1 trillion, and Europe combined held over $2 trillion.

Some politicians gripe about all the U.S. debt held by foreigners. Only a politician can have that kind of audacity. Guess who's creating the debt instruments that foreigners hold? If you said it's our profligate Congress, go to the head of the class. If foreigners didn't purchase so much of our debt, we'd be worse off in terms of higher inflation and interest rates. What about the possibility of foreigners dumping our debt? Foreigners aren't stupid. Dumping large amounts of Treasury bonds would drive down their value. Foreigners as well as we would take a hit.

The fact that foreigners are willing to exchange massive amounts of goods in exchange for slips of paper in the forms of currency, stocks and bonds should be a source of pride. It means America, with its wealth, rule of law and the sanctity of contracts, inspires foreigners to hold large amounts of their wealth in U.S. obligations. Their willingness to do so means something else: Trade increases competition. Ultimately it's competition, many producers competing for his dollar, that truly protects the consumer. What protects producers, at the expense of consumers, are restrictions on competition.

The quest to restrict competition is what lies at the heart of the trade deficit demagoguery.

When's the last time you heard a consumer complaining about his buying more from a Chinese or Japanese producer than that producer buys from him?
In other words: deficit schmeficit!


Kyle said...

As much as i love Walter Williams, (and I got my Economics degree from Chicago School professors who had the same views). I have to tell you that the whole thing is a little more complex.
Trade deficits can indeed matter. When we pay for the products with dollars which are kept artificially high by our main trading partners tagging their own currency to ours. There are other things involved, Dumping, China's disregard for our intellectual property rights. The fact that China still has Gulags and uses "slave labor"
China is not our friend and is a bellicose new superpower. I think there might be an awful lot of Rope-selling going on here. I am mostly in favor of free trade, but is it really free when the tail wags the dog? What happens when China uses its trade clout to twist arms in the USA to get industry to try to change our security priorities?
I would be a little more skeptical if I were you.

Reliapundit said...

kyle -

i like most that you read my blod and comment.

this time i disagree.

1 - you wrote: What happens when China uses its trade clout to twist arms in the USA to get industry to try to change our security priorities?

they would not do anything to destroy the biuggest trade relationship they have. they need us - and our diect investment in their economy. it makes war LESS likely.

2 - yes - it would better for us if their currency was not kepot weak. we need free markets in currency. theirs. but they are not our tail. it is a complex and unique relationship. it requires a unique strategy.

we need to get tougher with them on dumping and slave labor and north korea. but we do not need to foment those cissues into a major conflict.

but MOST imporetantly, your litany of issues has nothing to do with what williams is commenting on.

the FACT is that the figure called "trade deficit" is MEANINGLESS in real economic terms.
it has only demagoogic uses.

the goods/captial accounts are IN BALANCE. corporations pay for whatever they buy in china.

that china buys usa tres. notes is because it's the best investment they can make.

Reliapundit said...

the goods/captial accounts are IN BALANCE. corporations pay for whatever they buy in china.


the goods/captial accounts are IN BALANCE. corporations pay for whatever they buy in china.

we get goods; they get MONEY.

it's a BALANCE.

it's nice they re-invest a lot of it here.

it's GOOD they re-invest a lot of it here.

Anonymous said...

Is very informative to read a republican blog that loves the commies. For them Saddam, the head of a third world country was an immediate danger, but China, nah, China is a good client and they are more than happy to bend over and let the commies give it to them up their asses. These neocons are commies at heart.

Reliapundit said...
This comment has been removed by a blog administrator.
Reliapundit said...

i hate the chicoms.

this post was not about chicoms, per se, but the lunacy of "trade deficits" - which are simply a phony heuristic device meant to demagog the free trade issue.

here's what i blogged on the chicoms on JUNE 22:

GUARDIAN-UK: Chinese oil firm bullish over Unocal bid -

Thursday June 23, 2005: The state-run Chinese oil company CNOOC today said it was confident of winning a takeover battle for the US firm Unocal with a cash offer of $18.5bn (£10bn). Fu Chengyu, CNOOC's chairman, told Reuters he expected to beat a rival bid from Chevron while maintaining an investment-grade credit rating despite concerns that the acquisition would drive CNOOC into debt.

I hope the US government BLOCKS the sale of a major US oil company to a socialist, state-owned Chinese outfit.

We shouldn't sell to tyrannical socialists for filthy lucre what we defended with our blood.

ASIDE: THIS IS DIFFERENT than if some private Chinese BUSINESSMEN - with NO TIES to the Chinese socialist tyranny - want to buy ANYTHING in the USA.


UPDATE #2: Another reason we shouldn't allow the CHICOMS to buy a US company is BECAUSE THEY DON'T LET PRIVATE U.S. COMPANIES BUY CHINESE COMPANIES - THEY ONLY - REPEAT - ONLY ALLOW FOREIGNERS TO HAVE MINORITY - REPEAT - MINORITY OWNERSHIP OF CHINESE COMPANIES. What's good for the goose is good for the gander. I think this is a secondary issue, though; the PRIMARY issue is the fact that it is the CHINESE GOVERNMENT and one of their state-owned companies that wants to purchase UNOCAL. This must NOT be allowed to happen.

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