The Rabid Independent, Nonpartisan solutions, independent policy ideas

The US-China Trade Disaster

Chinese Trade Surplus Will Never Die (?)

So you say – we have entered a global recession, maybe even a
depression; surely the Chinese trade surplus will wither as western
import demand shrivels up.  The first report is in.  We have a new
record!  In October the surplus reached $35.2 bn..  In fact export
growth did weaken from a rate of 21.5% year over year to 19.1% but
incredibly, import growth collapsed from a rate of 21.3% to 12.4%.

Specifically the trade surplus with the US rose 13.3% year over year.  It is easy to
argue that Chinese goods that feed through say Walmart into the US can
not be replaced by US production and in fact are necessities that will
be bought even if the economy tanks.  I find neither one of these
arguments to be very compelling but the swing factor here is NOT our
imports which are down a little and acting as they should.  I would
expect to see further declines here as the economy falls further.  The
real story is (US) exports.

The published growth rate of the Chinese
economy has declined from 10.1% to 9%.  How does such a small decline
in the rate of GDP growth drive such a massive instant drop in
imports.  There are precious few explanations of this in the press
beyond the countless anecdotes about their economic malaise.  Could
their economy be so addicted to exports that any decline in exports
triggers a collapse in domestic demand?  If that’s true then the GDP
figures are being produced in a Chinese Disneyland.

The Left and the Right Converge (on Defense Spending)

Bob Herbert, the liberal editorial writer from the NY Times called for a shrinking of the defense budget and a reduction of the extension of American military power given our appalling economic circumstances. (Go HERE) We simply can't afford the same size commitment to the military.
The other famous exponent of a shrunken military is Ron Paul who has said repeatedly that we cannot afford countless foreign military bases.  The political spectrum has come full circle on this issue.
Are there any plans to shrink the defense budget?

Not that I see.

Income Tax Progressivity

A hot topic is the recent changes made to the tax code by the new Obama administration.  The tax rate on the top 2% is going up and their deductions are going down.  The tax rates on the rest of the population will decline.  This is a relative redistribution of the tax burden (this does not redistribute wealth since this is not a wealth tax).  Is that fair?
When we open up our borders to trade with 3rd world countries then indirectly our labor begins to compete with their labor.  The resulting exporting of jobs forces our union system to cower and the leverage that workers have to ask for raises, collapses.  This is called factor price equalization and while it drives down incomes for most Americans, it improves the returns on management who can now oversee more productive processes where their companies' ROE inexorably rises.  We see this in all the fake productivity numbers that are generated when we make parts offshore and then complete the assembly here – with fewer US workers.  Miraculously our productivity improves.
So moving jobs offshore drives a wedge between the different strata of our labor pool and it is logical to tax the beneficiaries at a higher rate and the victims at a lower one.

Why does it matter that we have a huge trade deficit with China?

The US trade deficit with China has been exploding since President Clinton granted them MFN status in 1994.  A first world country will never profitably trade with a third world country where there is no minimum wage, no pollution controls, no patent or copyright law, and (especially) no floating currency.  What we get are unbelievably cheap imports which relative to our first world salaries are irresistible  Our trade account goes into massive deficit, our savings rate collapses and consequently our investment rate collapses with it. Us-china-trade-deficit-2006

Everyone understands that in the long run an economy without investment will die.   We have now become dependent on China to fund our profligacy and our economy has become distorted toward non-tradeable goods.  We are now an economy of lawyers, brokers, and plumbers.  As Kevin Phillips has said -" the only thing we have become good at producing is debt."

Fair and Unbalanced

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