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Monday, April 11, 2005

Trade Balances

Paul A. Volcker writes about the trade imbalance in The Washington Post:

The U.S. expansion appears on track. Europe and Japan may lack exuberance, but their economies are at least on the plus side. China and India -- with close to 40 percent of the world's population -- have sustained growth at rates that not so long ago would have seemed, if not impossible, highly improbable. Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.
Whatever you may think about Volcker's recent work for the U.N., he remains a first rate economist and what he writes here is well worth reading. I certainly can't claim any great expertise at international economics and trade flows, but I think that there is a bit more to the story than this though. A good deal of our trade imbalance results from our trade with China. China one the other hand is aquiring dollars at a voracious rate, mostly as a means of keeping their currency at a fixed price to the dollar despite this trade imbalance. In essence, this means that we end up being able to buy more Chinese goods that we should be able to buy. Another way of looking at this is that, China is offering its goods to the United States at a 'sale' price. There are a couple reasons for them to do this. First off, there is the same reason any seller offers things at sale prices: getting a customer accostumed to a new product. That certainly plays a part in this. Cheap Chinese goods help them quickly penetrate markets which fuels their economic growth. It isn't quite as good as it appears, because they are artificially depressing their currency, but it is still very impressive growth. Secondly, despite China's dreams of military glory in the future, they, like the rest of the world have a vital interest in the U.S. being the 'global policeman.' Oil is the economic lifeblood of the world and that blood flows across the Oceans. The U.S., pretty much single handedly, is responsible for maintaining peace on the high seas. Should U.S. economic power fail, this world policeman role will fail as well to everyone detriment. Some of the first signs of Rome's failure was an underfunding of their military (naval power was especially cut) and the resulting piracy pretty much closed the sea lanes. That spelled doom for Rome, and the rest of the Roman world. I suspect a similar dynamic could follow a U.S. economic collapse. I also expect that the rest of the world is aware of this. I don't know if this is true or not, but a 6% (the amount of our trade deficit) tax on the rest of the world doesn't seem innappropriate for this (and other) military service. Is the U.S. trade deficit a new type of post-globalization world tax? I don't know, but it does seem possible.


Blogger The probligo said...

"Another way of looking at this is that, China is offering its goods to the United States at a 'sale' price."

Another way of saying the same thing is -

"The cost of producing the same product in NZ (or US) is far too high."

The fact that China can produce (as an example) Guns'N'Roses t-shirts at, say, 10% of the price of the equivalent NZ product points to the real problem.

The fact that NZ can produce lamb and dairy products and get them to the US cheaper than the farm gate prices for US producers says that NZ farmers are economically more efficient.

The very big problem faced by the US in your instance is that the difference in production costs is backed by differing "standards of living".

4/11/2005 01:34:00 PM  
Blogger Dave Justus said...

Obviously countries are producing things at different rates, the beauty of trade is the production goes where it is more efficient. This benefits everyone.

The problem America is currently bringing in signifigantly more than we are sending out. Usually this is possible only by converting existing accumulated capital, and while that is happening, it isn't the biggest part of that. The biggest part is other countries, most signifigantly China, are infusing capital directly into our society, preventing a natural currency fluctution (Chinese money worth more, U.S. money worth less) that would balance out the situation.

The net result of this is that it is cheaper for an American to buy a Chinese product than it is for a European to by a Chinese product. Hence my term a sale price for Americans.

4/11/2005 02:52:00 PM  
Blogger jaymarie said...

[way off the subject here: Dave, I just want you to know that I am not intending to ignore your questions on euthanasia from my blog, I am actually still formulating my ideas about it. I'll get to it soon... Thanks for your valid comments and questions.
Sorry to inturrupt your comments here.
I would have e-mailed you, but, well, I don't have your address :) ]

4/12/2005 08:49:00 AM  
Blogger Dave Justus said...

Jay Maria,

Just to let you and anyone else who is interested know, there is an email me button at the below the archive section to the left.

My email is DavidJustus@gmail.com and anyone is free to email me if they do not wish to make a public comment.

4/12/2005 11:56:00 AM  

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