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Richmans' Trade and Taxes Blog
Is the 2010 Trade Report the Prelude to a Dollar Collapse?
Howard Richman, 2/11/2011
This morning, the BEA put out its first estimate of the U.S. trade deficit in 2010. In all it rose from $375 billion in 2009 to $498 billion in 2010. In the graph below, our monthly trade deficit in 2009 is shown in blue and our monthly trade deficit in 2010 is shown in red:
Meanwhile our merchandise trade deficit with China reached a record $273 billion in 2010, a full 55% of our total trade deficit (goods plus services) with the entire world. The growth in our bilateral trade deficit with China defied the fact that demand in China is rising about four times as fast as demand in the United States. In the graph below, our 2009 trade deficit with China is shown in blue and our 2010 trade deficit is shown in red:
The Chinese government keeps out American products through a wide variety of pretexts. Some of them are WTO-legal, including:
- Exclusion of American products from government catalogs. The Chinese government publishes catalogs which specify the products that may be purchased by its huge government controlled sector. These catalogs routinely exclude American products.
- Manipulation of dollar-yuan exchange rate. The People's Bank of China manipulates the dollar-yuan exchange rate to keep American products high priced relative to Chinese products. These manipulations make Chinese products more competitive and American products less competitive in world markets, including those in China and the United States.
- High Tariff Rates. China imposes high tariffs (about 25%) on a wide variety of U.S. products including cars, trucks, motorcycles, textiles, raisins, and mining machinerly.
On the other hand, some of the Chinese government's trade manipulations may violate WTO rules, according to the 2010 Report to Congress on China's WTO Compliance published by the United States Trade Office. These include:
- Continuing piracy of intellectual property "Despite repeated anti-piracy campaigns in China and an increasing number of civil IPR cases in Chinese courts, counterfeiting and piracy remain at unacceptably high levels and continue to cause serious harm to U.S. businesses across many sectors of the economy." (p. 5; pdf p. 13)
- Increasing requirement that U.S. R&D be Moved to China. "In 2010, policies aimed at promoting 'indigenous innovation' became an important component of China’s efforts. For example, China began to link government procurement and other preferences to discriminatory criteria, such as the possession of intellectual property owned or developed in China. (p. 6; pdf p. 14)
- Increasing Restrictions upon Rare Earth Exports. "As in prior years, China continued to deploy export quotas, export license restrictions, minimum export prices, export duties and other export restraints on a number of raw material inputs where it holds the advantage of being one of the world’s leading producers. Through these export restraints, it appears that China is able to provide substantial artificial advantages, both in China’s market and other markets around the world, to a wide range of downstream producers in China." (p. 6; pdf p. 14)
- Regulatory Restrictions on U.S. Agricultural Products. "In 2010, the principal targets of worrisome practices by China’s regulatory authorities were poultry, pork and beef products, where anticipated growth in U.S. exports of these products was again not realized. In particular, China continued to block the importation of U.S. beef and beef products, well over three years after these products had been declared safe to trade under international scientific guidelines." (p. 8; pdf p. 16)
The United States does not need to tolerate these continuing trade predations which are causing our growing trade deficits with China. WTO rules provide a remedy for trade deficit countries, like the United States, that also have a large foreign debt. A WTO-legal scaled tariff to balance trade would force China to take down its barriers to American products or face tariff barriers upon its exports to the United States. Such a tariff would be designed to take in 50% of our trade deficit with China as government revenue. It's duty rate would go up when the trade deficit increases and down when it decreases. It would disappear when trade approaches balance.
If we don't balance trade soon, the dollar will be forced into a collapse. In fact, the end-game toward that collapse has already begun. This week, the International Monetary Fund (IMF) backed the idea of turning the IMF's Special Drawing Rights (SDRs) into an international currency to replace the dollar, an idea that was first proposed by Zhou Xiaochuan, head of the People's Bank of China in a March 23 2009 statement. Zhou's goal was clear. He pointed out:
And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
The coming dollar collapse will not be pretty. It will be accompanied by high inflation, high interest rates, and the need for the United States government and American companies to borrow in foreign currencies in order to finance imports. The American standard of living will be severely cut. All this will take place because our government would not impose a WTO-legal scaled tariff to balance trade.
Comment by logan, 2/12/2011:
The government procurement policies allow American companies to set up subdiaries in China in order to gain the opportunity of a government contract. I don't see anything wrong with that. I think you guys should do a little more research obviously.
Response to this comment by Howard Richman, 2/13/2011:
If we passed the scaled tariff American producers would be able to export to China without having to share their technology with their Chinese competitors.
Response to this comment by David, 2/14/2011:
Mr Richman.........I agree with your response to the individual who said,paraphrasing here, the fact that american companies can set up shop in china makes it equal does not understand that China is only allowing that to basically, i'll say it for you, so you dont get in trouble, "shaking down, then stealing" our technology and business processes from those same companies allowed in.......In a couple of years, these American in China compete with chinese companies, and guess who wins?.......See Caterpillar........Ask GE hows it going in China?
WHile i think Warren Buffets plan is the best, please keep on doing what your doing Mr Richman.........
In the last 30 years or so, the business and economic professor's from there ivory towers in our universities who have brainwashing the masses, i was one too, about the benefits of "free trade" has past the point of stupidity long ago, and is now borderline economic treason.
Comment by , 2/20/2011:
Isn't it time we realize the government is purposely devaluing our currency to get at the cash mountain of savings the baby boomer generation is hoarding for their senior years - i.e. they want the cash to be circulated. In addition the 2.6 trillion surplus of SSI money which the government put in the bond market is maturing and the cost in payment is creating a void of income to the bond market - the flow is reversing to the boomers from the government. 401k, ira's and ssi is breaking the government's back and they do not know where to look for the cash. So they are doing what the government always does they tax their children.
Response to this comment by Tony, 2/21/2011:
Just adding to my comment which did not have my name initially.Another way of putting it. The 14+ trillion deficit amounts to $100,000 per citizen. So Uncle Sam is devaluing our currency to give us the opportunity to participate in paying it's debt. The U.S. is the world's largest holder of gold. The value of gold will have to rise to 10,000 an ounce to pay it's debt or the dollar will have to fall further in the face of gold's rise to pay it.