Monday, December 11, 2006

What if China or Canada Became 51st State?

We have about a $200 billion annual trade deficit with China for goods and services. American consumers and businesses buy about $275 billion of Chinese goods per year and the Chinese buy about $75 billion of goods from the U.S. There is a lot of angst, hand-wringing and concern about our overall trade deficit ($750 billion for 2006) with the rest of the world, and a lot of specific concern about our $200 billion trade deficit with China. Treasury Secretary Henry Paulson will visit China this week to discuss trade issues.

Think about this simple thought experiment, and for the moment ignore any of the cultural and political implications. Suppose that in 2007, China became the 51st state of the United States. In that case, the $200 billion trade deficit would suddenly disappear. If that is too hard to imagine, assume that Canada became the 51st state in the United States - our $75 billion annual trade deficit with Canada would immediately disappear.

How could the trade deficits with Canada or China be considered a concern or problem now, when those trade deficits would disappear if Canada or China were one of our states? If you're not convinced, when is the last time you heard any concern or hand-wringing about any trade imbalances or trade deficits between two states like Michigan and Arizona?

No doubt, Michigan exports a lot more merchandise (motor vehicles) to Arizona, than Michigan imports from Arizona, leading to a "trade imbalance" between those two states. Michigan probably has a trade surplus with Arizona, and Arizona has a trade deficit with Michigan. Who cares? Nobody. What difference does it make? None.



At 12/11/2006 1:21 PM, Anonymous Walt G. said...

How can you really ignore cultural and political implications. It doesn't matter how global the economy becomes we still self-identify as "Americans" and not earthlings.

Possibly if we evolve to a new world order with one leader for the whole planet we will think as one group of people. Maybe, we are in a global economy war right now and don't realize it.

After all, it took the Civil War for the United States' citizens to think of themselves as American instead of a Virginian.

Anyone have any thoughts about this?

At 12/11/2006 4:09 PM, Blogger Mark J. Perry said...

In that case, think of the time before Hawaii and Alaska were U.S. states, or think of any other states that were added during the 1800s. Before they became states, we had trade imbalances between them that disappeared after they became states - that is the main point. If trade imbalances between states don't matter, why should trade imbalances between countries matter? My opinion: they don't matter.

At 12/11/2006 8:01 PM, Anonymous Walt G. said...

I guess I am looking at it more like this:

If I have $200 and want my truck washed and pay my wife $20 to wash it, we still have $200 in our family and I have a clean truck However, if I pay the neighbor the $20 to wash my truck, I will have a clean truck, but my family only has $180 now.

Using the United States as the family, wouldn't it behoove us to spend the money in our family, the U.S., instead of giving the money to a neighboring country? That money would be circulating here and building our bridges, roads, paying our policeman, and supporting our schools.

I'm not sure I understand all the ramifications of globalization and free trade. But all things considered, such as price, quality, etc, I would choose to buy from friends and family (or the U.S.) if possible. Likewise, I hope they would choose to buy from me if I can supply them with a competitive product. Isn’t supporting one another how business works?

I know that I don’t have all the answers. Am I missing something here?


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