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.