Scapegoat, Made in China
Global trade isn’t all that complicated. Just think of the world as a mall, the United States as its most indefatigable shopper and China as the anchor department store that graciously keeps raising our credit limit so that our buying spree can go on.
The U.S. trade deficit rose to a record $61 billion in February, in large measure because of rising oil prices and those escalating credit card bills from China. Sluggish growth elsewhere has tempered demand for U.S. exports despite a weaker dollar. Although trade deficits are usually portrayed as bad news, they tend to widen when the U.S. economy is expanding.
It’s also true that the notorious deficit with China -- $14 billion in February -- is overstated in an important sense. The bulk of this comes from all-American transactions: the shipment back to the U.S. of goods made in China by U.S. companies.
You can debate the pros and cons of American companies boosting their profits and giving consumers lower prices by outsourcing manufacturing to China (now mostly from nations such as Mexico instead of the U.S.). But let’s not pretend that the United States is being taken by wily foreigners who don’t play by the rules, as too many wily politicians in Washington are doing.
Last week, the Commerce Department launched an investigation into whether Chinese apparel imports were disrupting the U.S. market -- the first step toward quotas. Triggering the probe is a flood of Chinese imports since Jan. 1, when global quotas on Chinese textiles and apparel were lifted.
There’s no doubt that the U.S. textile market is being disrupted. But there’s quite a bit of doubt that those businesses would have survived even without the boost in Chinese imports. And it is a near certainty that protecting a small but politically powerful textile industry at the expense of retailers and consumers will not benefit the economy.
The escalating China-bashing in Congress on other fronts is threatening to create a far greater economic problem than any we face currently. Sen. Evan Bayh (D-Ind.) is threatening to hold up the confirmation of the Bush administration’s nominee for trade representative, Rep. Rob Portman (R-Ohio), unless the Senate considers his bill aimed at stemming China trade. Another bill would slap hefty tariffs unless Beijing stops pegging its currency, the yuan, to the dollar.
The currency issue is a convenient scapegoat.
Unless you live on the other side of the Pacific, it’s far better to blame an undervalued yuan for all our supposed ills than it is to blame federal budget deficits or the Federal Reserve’s role in artificially inflating consumer spending. Nor is it convenient for members of Congress to dwell on the fact that Washington has often advised other nations to peg their currencies to the dollar as a means of encouraging stability, and that as recently as the East Asian financial crisis of the late 1990s the U.S. was grateful that China didn’t devalue the yuan.
Even if China did allow its currency to float freely and appreciate against the dollar -- a move that would create a set of new risks to that nation’s banking sector -- it would hardly alter the underlying dynamic of the Sino-American relationship.
A 10% or even 30% rise in the value of the yuan would be negligible compared with the 20-1 or 30-1 wage differential, the driving force behind the trade deficit between the two countries.
The magnitude of our trade deficit (coupled with our budget deficits) does seem unsustainable in the long run. But the Chinese-American deal -- they sell, we borrow and buy, they acquire a vested interest in the health of the American economy because of all those Treasury IOUs in their vault -- is crucial to global prosperity and serves to align the interests of the world’s two most important economic engines.
