Sunday, March 21, 2010

China and U.S.: There Really Is NO Trade Imbalance

Click to enlarge.
Don Boudreaux picks a nit about "trade imbalances" with Jeremy Warner, who writes an otherwise excellent article in the London Telegraph about Paul Krugman's misguided suggestion of a 25% surcharge tax on China's imports American consumers and U.S. companies who buy goods from China for their low prices and great value:

"You write as if the alleged trade imbalances between the U.S. and China are real. They are not. The Chinese sell Americans goods; we pay with dollars; the Chinese then use many of these dollars to buy IOUs issued by Uncle Sam. Although the result is a measured U.S. current-account deficit with China, there’s no more any economically meaningful “imbalance” in such a result than there would be if, say, Texans lent a lot more of their dollars to Uncle Sam.

Talk of imbalances in trade diverts attention from the real problem: Uncle Sam’s gargantuan debt. That fast-accumulating debt is a huge problem. It is caused, though, not by trade with China but, rather, by Washington’s lack of fiscal discipline. Unless you believe that protectionism (and only protectionism) would induce Congress to be more fiscally disciplined, you should avoid all talk of imbalances in trade and instead talk of imbalances in political institutions that encourage politicians to give disproportionate weight to the demands of current voters and to ignore the resulting ill-consequences that will curse future generations."


MP: The graph above illustrates Don's point that there is no "trade imbalance" once all international transactions are accounted for:

1. In 2009, the U.S. imported more from China ($354 billion) than it exported ($93 billion), resulting in a "trade deficit" of -$263 billion on our "current account" (data here).

But that is only part of the international trade story, since there are also financial transactions that have to be accounted for, and that deficit on the current account has to be offset somehow, since all international trade has to balance (it's based on double-entry bookkeeping).

2. The offsetting balance came from the $263 billion capital account surplus in 2009, as a result of $263 billion of net capital inflow to the U.S. from China to buy our Treasury bonds and other financial assets.

3. The $263 billion capital account surplus exactly offsets the current account deficit.

Bottom Line: As Don correctly points out, there really is NO trade imbalance, when we account for: a) exports and imports of goods and services, AND b) capital inflows/outflows. Stated differently, the balance of payments is always ZERO. We buy more of China's goods than they buy of ours, but then China buys more of our financial assets (bonds and stocks) than we buy of theirs. So in the end, international trade with China, is balanced, not imbalanced.

32 Comments:

At 3/21/2010 11:10 AM, Blogger PeakTrader said...

Government has been successful shifting blame. Consequently, the private sector is a failure, e.g. the Bush economy, health care, Wall Street, etc.

The imbalance is government draining dollars from the private sector, causing a recession, and then refusing to redirect enough dollars where needed to employ idle resources. So, the U.S. economy has underperformed over the past three years.

 
At 3/21/2010 11:20 AM, Blogger PeakTrader said...

It's ironic a communist government helped turned the U.S. into a Marxist-socialist country.

 
At 3/21/2010 12:55 PM, Anonymous Anonymous said...

Balance of payments is NOT trade balance.

If a 5-year old boy understands this, I wonder why makes you and your friend Don not too.

 
At 3/21/2010 1:51 PM, Anonymous Benny The Man said...

Well, if Uncle Sam wiped out that Red State Socialist Empire, demilitarized like the Soviet Union did, and cut other federal outlays, and then actually balanced the federal budget, then China would have to buy something else from us other than federal IOUs--probably our assets, such as our factories, land, and operating companies.
I guess we would all be speaking Chinese already.

That damn Chinese written language looks effing impossible to learn. Why can't the Spanish conquer us, or the French?

 
At 3/21/2010 2:07 PM, Anonymous Anonymous said...

That damn Chinese written language looks effing impossible to learn.

One language at a time. First, you need to learn English.

 
At 3/21/2010 3:24 PM, Blogger sethstorm said...

I'd like to know how that balance gets restored with regards to offshored jobs that don't really come back.

That country doesn't seem to be one that will be using robotics anytime soon. They rely on a constant employer-friendly glut and currency pegging to keep things the same.

 
At 3/21/2010 4:10 PM, Anonymous Lyle said...

SethStorm, there have been stories suggesting that the chinese labor pool is getting low. Note also that in 5 years the working age percentage of the population in China starts decreasing. There is now talk of more doing like where I buy my clothes making them in Pakistan and other lower cost countries. China has to move up the food chain in production, to survive just like Japan did. However compared to Japan they did not get rich enough fast enough to avoid the aging population problem. Ultimatly we may see clothes made in sub sahahan africa as the last low cost labor location left.

 
At 3/21/2010 4:33 PM, Blogger PeakTrader said...

Seth, we could stop offshoring and produce the goods ourselves, e.g. at twice the costs. Given there would be fewer goods to buy, we can close half the shopping malls in the U.S.

 
At 3/21/2010 4:44 PM, Blogger sethstorm said...


Note also that in 5 years the working age percentage of the population in China starts decreasing.

It's still a large enough glut to be felt in the US. No matter what hell-hole you use, that always is the case.


China has to move up the food chain in production, to survive just like Japan did.

The problem is that they show no sign in moving up. If they can produce junk that's pegged to be cheaper than most other places, they can suffer the few products that don't respond.

I'm not sure this would give rise to better conditions out the sake of running out of people to kill or blacklist into subsistence.

Even Japan is showing signs of moving downward in quality. Yes, downward.


There is now talk of more doing like where I buy my clothes making them in Pakistan and other lower cost countries

Already a solid practice for decades. My issue is with limiting the damage such that very few industries do get offshored.

 
At 3/21/2010 4:55 PM, Blogger sethstorm said...


Seth, we could stop offshoring and produce the goods ourselves, e.g. at twice the costs. Given there would be fewer goods to buy, we can close half the shopping malls in the U.S.

The question is would it be suffering more in variety or increasing the quality of what does exist.

I draw the line when it's being sent to places just to get around US-derived market forces(where quality usually is forgotten). Usually this means some undeveloped country that perpetually undercuts US/Western Europe.

 
At 3/21/2010 4:58 PM, Anonymous gettingrational said...

Which foreign coutry holds the most U.S. Treasuries?

Is it China with its vast U.S. reserves because or its 58% share of the U.S. trade deficit?

The biggest creditor is Japan.

BTW, conflating trade account and current account to counter inbalance arguments is wrong -- the free exchange of goods and services is being hijacked by mercantilism.

 
At 3/21/2010 4:59 PM, Blogger sethstorm said...

Further, I'd have no problem with killing the current iteration of it. Perhaps it would start the discussion as to making a more US-citizen-friendly form that isn't simply a "job & industry funnel to Third World".

It's all fun and games until your industry gets attacked (doubly so if you got out of manufacturing and into another one).

 
At 3/21/2010 5:07 PM, Blogger sethstorm said...


The biggest creditor is Japan.

The only signal that should be given by that is to turn the screws harder on China.

 
At 3/21/2010 5:23 PM, Blogger PeakTrader said...

Seth, why stop or slow improvements in living standards and the inevitable shifts into new industries? Moreover, there are quality standards.

Of course, there could be better policies to deal with displaced workers, e.g. subsidizing college degrees in demand rather than all college degrees.

 
At 3/21/2010 7:21 PM, Blogger OA said...

gettingrational said...
Which foreign coutry holds the most U.S. Treasuries?
...
The biggest creditor is Japan.


gettingrational, I just popped into the US Treasury website to check if things changed. And the table has been revised significantly.

It seems like the prior Treasury table was incorrect as the figures for China are now over $100 billion higher, all the way back to June 2009. It is disturbing that for nearly a year, the Treasury data has been wrong, and that someone only seemed to notice once that flip between Japan and China was widely reported.

There actually are two columns reported for June 2009. New 5/series and Old 5/series. Then the new number carries on from that point.

http://www.ustreas.gov/tic/mfh.txt

 
At 3/21/2010 8:00 PM, Blogger sethstorm said...


Of course, there could be better policies to deal with displaced workers, e.g. subsidizing college degrees in demand rather than all college degrees.

Indeed. It is time enough to not presume that the displaced will automatically transition (or can be with how things are now).

The current policy seems to be optimized for political uses that focus on harming US citizens. It is too far optimized at destroying than rebuilding and creating. Creation is just an unintended & selective side effect.

Halting it would put the issues of fraud and dishonesty front and center. It would ask if it's really worth using it as a weapon against having to respond to the US market.

Another part of it would revisit the idea of what really needs a degree, and what requires it out of liability/legal issues. A degree is hardly the thing to use to save (or damn) someone (or their profession).

 
At 3/21/2010 8:05 PM, Anonymous gettingrational said...

OA, thank you for the correction to the treasuries report. My source was the Bangkok Post. Our friends in Asia must be thinking the U.S. has so much debt they can't keep up with it all -- so do I.

 
At 3/21/2010 9:13 PM, Anonymous Frank said...

Of course ther is no trade imbalance with China, the Chinese buy all the U.S made, televisions, computers, refrigerators, clothes, shoes, cars, trucks, toys and countless other cheap plastic gadgets.

 
At 3/21/2010 9:37 PM, Blogger juandos said...

sethstorm apparently can't use google: "I'd like to know how that balance gets restored with regards to offshored jobs that don't really come back"...

Did YOU sethtsorm support politicos that pushed Sarbanes - Oxley?

Did YOU sethtsorm support politicos that pushed stronger and stronger CAFE standards?

Did YOU sethtsorm support politicos that pushed harsher punishments for industries that alledgedly flouted some asinine EPA standard?

Did YOU sethtsorm support politicos that pushed higher corporate tax rates?

Did YOU sethtsorm support politicos that pushed ObamaCare?


Did YOU sethtsorm support politicos that foisted off the myth that diversity training was useful?

A 'YES' to anyone of these questions means the odds of more jobs going offshore is increasing...

 
At 3/21/2010 10:29 PM, Blogger sethstorm said...


A 'YES' to anyone of these questions means the odds of more jobs going offshore is increasing...

Thank you for proving my point of it being used as a political weapon. You could have made the case for the opposition and it still wouldn't have mattered.

 
At 3/22/2010 4:18 AM, Blogger Ron H. said...

Anon @ 12:55

Trade balance is a PART of balance of payments. We buy cheap stuff from China with dollars, China buys Treasury Bills from US with those dollars. Balance=0

 
At 3/22/2010 10:12 AM, Blogger juandos said...

"Thank you for proving my point of it being used as a political weapon"...

No sethstorm, I proved your inability to get a grip on reality...

All those things I mention impinge on the bottom line and the resulting costs can't be continously foisted off onto the customer since others will sell a product or service cheaper due to the fact that they aren't burdened with these sorts of government overheads...

 
At 3/22/2010 11:51 AM, Blogger Mike Razim said...

Many are also claiming that the US manipulates its own currency. So is the US being a hypocrite: http://bit.ly/aoI5nB Or do we have room to talk?

 
At 3/23/2010 6:16 AM, Blogger sethstorm said...


All those things I mention impinge on the bottom line and the resulting costs can't be continously foisted off onto the customer since others will sell a product or service cheaper due to the fact that they aren't burdened with these sorts of government overheads...

Or their government overheads are redirected such that critics are killed at the direct request of the company. Any government overhead is devalued below any developed (First World) nation's ability to reach.

It's easy to crank out tons of junk-grade equipment or serve at the lowest quality. First, forcefully devalue your currency so far below the US that it would be impossible to catch them w/o a tariff. Then you kill all your critics, and bill the families involved. Finally, you lobby in foreign countries like the US to keep the game going.

Congratulations, you just made the problem worse.

 
At 3/23/2010 10:30 AM, Blogger OBloodyHell said...

> since all international trade has to balance (it's based on double-entry bookkeeping).

...Unlike ALL federal accounting, which has NEVER been subject to GAAP.

I really do thing we need to pass a Constitutional Amendment which forces government at all levels -- Federal, State, and Local -- to use GAAP, and to publish the "account books" for their organization at least once a year.

While there might be some areas not open to precise public attention, those areas (military procurement, intel gathering) can and should be distinctly limited in size and scope.

90% of the looming problems are tied to various blatant scams that the government pulls because it can get away with them by ignoring GAAP -- things that NO business would ever be allowed to pull.

 
At 3/23/2010 10:34 AM, Blogger OBloodyHell said...

> then China would have to buy something else from us other than federal IOUs--probably our assets, such as our factories, land, and operating companies.
I guess we would all be speaking Chinese already.


Yeah, we'd have to switch from the Japanese we've been speaking since the late 1980s, Benny....

Man, there are times it's amazingly impressive how you manage to be such a blatantly clueless, clotheaded idiot.

You manage to occasionally get something right, but I'm not certain that's not just the "analog clock" issue.

Seth and Boobie do manage to outdo you on being consistently wrong, however, so if your goal is to Never Be Correct, you need to step up your game a bit.

 
At 3/23/2010 10:36 AM, Blogger OBloodyHell said...

> One language at a time. First, you need to learn English.

Oh, anon, come on. He does ok with English. Compared to his math skills, he's an expert grammarian.

:oP

 
At 3/23/2010 10:42 AM, Blogger OBloodyHell said...

> I'd like to know how that balance gets restored with regards to offshored jobs that don't really come back.

They don't seth. EVER.

Just like we no longer utilize 80% of American labor force to produce food, without a major, worldwide economic collapse, we won't EVER AGAIN be using 80% of the labor force to make goods. We won't, before too long, be using more than 2-5% of that labor force for what goods we make.


Duh.

REALLY, REALLY DUH.


Not that you're going to read it, or, if you did, that it will stick, but just for others who actually want to know the answer and aren't too dense to Get It:
The Nation That Lost Its Jobs But Got Them Back

It's an introduction to the concept/principle of Comparative Advantage

 
At 3/23/2010 10:49 AM, Blogger OBloodyHell said...

> Ultimatly we may see clothes made in sub sahahan africa as the last low cost labor location left.

At which point it may return home in the form of fully robotic factories.

If you've seen the movie Minority Report, you ought to be able to get the idea. While that's not yet practical, it's certainly the long-term result for the whole of manufacturing -- just as 2-5% of the populace makes food, so, too, will 2-5% of the populace make essential goods.

Just as there are gourmet and specialist foods (think "organic", for example), there also will be specialist goods (think unique, hand-crafted and one-off furniture as opposed to mass-produced stuff) but this is and will always be a niche market. Most just want the basic need fulfilled, and don't want or care about the niche desire.

 
At 3/23/2010 10:52 AM, Blogger OBloodyHell said...

> The problem is that they show no sign in moving up. If they can produce junk that's pegged to be cheaper than most other places, they can suffer the few products that don't respond.

Geez, they're only fifteen to twenty years into this process you DUMBASS.

How long did it take for Japan to do that? A whole generation, at the least.

Friggin' A. Are you really that incompetent at figuring things out for yourself, or do you just act that stupid in blog commenting?

 
At 3/23/2010 10:56 AM, Blogger OBloodyHell said...

> Seth, why stop or slow improvements in living standards and the inevitable shifts into new industries? Moreover, there are quality standards.

Because, PT, he's an ignorant twit parroting crap fed to him by liberal twit neoK econ profs. You can't convince him he's wrong because you'd have to humiliate those incompetent profs in a public manner which will never happen.

Until that time, he's going to spout the same sort of idiotic garbage.

 
At 3/23/2010 11:02 AM, Blogger OBloodyHell said...

> Of course there is no trade imbalance with China, the Chinese buy all the U.S made, televisions, computers, refrigerators, clothes, shoes, cars, trucks, toys and countless other cheap plastic gadgets.


No, they PIRATE US-made IP without paying for it.

Get them to pay some rational value for that -- a few pennies each per billions of items pirated -- and it's going to add up to some real money. And the US-China trade imbalance probably disappears, along with most of the other trade imbalances.

Mind you , that's not an argument in favor of cracking down on piracy, it's an argument in favor of revising the system so it doesn't require "cracking down on it" by delinking "control" (no longer possible) with "remuneration" aka "rewards".

 

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