Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

China's trade strategy explained
Howard Richman, 2/12/2012

[I recently had a chat with one of my students in which I explained how China's trade strategy works. I thought some of you who are confused about China's strategy might find it interesting also.]

Student 6:01 pm
Can you describe how building up foreign reserves help the economy?

Howard Richman 6:03 pm
It lets those producing in the mercantilist country make huge profits by selling at a low currency rate. That gets businesses to build factories in the mercantilist country. The mercantilist country gets manufacturing investment, and its trading partners don't. Fixed investment causes long-term growth, and there's more to it than just that. The mercantilist country's workers learn by doing. So become better and better workers.

Howard Richman 6:05 pm
And so the mercantilist country takes over its trading partners' comparative advantages. But China's main goal is power. It wants to increase its power and bring down ours, and that's what it's doing, and we're letting them. Power was always one of the main goals of the mercantilists.

Student 6:06 pm
Well it seems like a risky investment that they're putting so much into our dollar when it's on the verge of crashing. If our dollar becomes completely worthless does it benefit them?

Howard Richman 6:07 pm
You are correct. Their government will lose much of the money that it loaned to the United States.

Howard Richman 6:07 pm
But, they're putting as much as they can into assets that won't lose their value when the dollar crashes.

Student 6:07 pm
What kind of assets are those?

Howard Richman 6:08 pm
Stocks, land, etc.. Also they are trying to get the International Monetary Fund (IMF) to turn its Special Drawing Rights (SDRs) into a global currency. If China gets its way, the IMF will convert China’s dollar reserves into SDRs.

Student 6:11 pm
That sounds sensible.

Howard Richman 6:11 pm
Still, they are bound to lose a lot. But look what they get in return:

  • investment in their economy,
  • a 10% rate of economic growth,
  • growing economic power,
  • they are threatened by democracy, so they prove that their totalitarian system of government is more effective than ours at growing an economy,
  • eventually, they get to dominate their region.

Student 6:13 pm
haha, not a bad trade!

Howard Richman 6:13 pm
It's a bad trade for us, though.

Student 6:14 pm
Yes definitely.

Howard Richman 6:14 pm
We get consumer goods that we couldn’t afford otherwise, but we trade away our future to get them.

Student 6:15 pm
I was wondering how to argue against people who claim that we shouldn't put tariffs on countries, even if they put tariffs on us. (Let's assume for simplicity that the country isn't mercantilist.)

Howard Richman 6:15 pm
Well, if trade is balanced, then tariffs don't help. The problem is, most economists don't realize that they are assuming balanced trade when they conclude that tariffs don't help.

Student 6:18 pm
How is it the case that tariffs don't help when trade's balanced?

Howard Richman 6:19 pm
If trade is balanced, then if a country restricts imports it is also reducing its own exports. So it hurts itself just as much as it hurts its trading partners.

Student 6:22 pm
How does it reduce exports? Timothy Taylor [The Great Courses economics lecturer] tried to explain this by saying that exports are used to pay for imports always, and that they had to equal.... so by bringing down imports you inevitably had to bring down exports. But this payment argument didn't make much sense to me considering the mess we're in right now.

Howard Richman 6:22 pm
Timothy Taylor is assuming balance. That means export = imports. He doesn't understand mercantilism, just like most other economists in the universities.

Student 6:23 pm
OK, let's assume balance.

Howard Richman 6:23 pm
OK. Then if you reduce imports, since imports = exports, you necessarily reduce exports.

Howard Richman 6:25 pm
Assume that there are no loans between countries. Then if country B puts a tariff on the products of Country A, it reduces its imports. Now its businesses are getting lots of A's dollars. They sell them in currency markets. A's currency goes down. Then other products that A sells become more inexpensive in Country B. So trade comes back into balance.

Howard Richman 6:27 pm
But if country B is China, it buys the dollars that are earned by its exporters, and lends them to the U.S., so that it can perpetuate the trade surplus.

Student 6:28 pm
So the reason why things aren't coming into balance is because they're not selling the dollars in the currency markets?

Howard Richman 6:29 pm
Correct. That's how they do it. There's a name for it. It's called "sterilization."

Student 6:30 pm
Okay, I understand it a lot better now.

Howard Richman 6:30 pm
They "sterilize" the dollars that their exporters earn.

Student 6:30 pm
So they're virtually giving us the high imports without giving themselves the raised prices?

Howard Richman 6:31 pm
You got it!

Student 6:32 pm
Wow, I'm understanding this a lot better now.

Your Name:

Post a Comment:

  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Jan 2022
    Dec 2021
    Nov 2021
    Oct 2021
    Sep 2021
    May 2021
    Apr 2021
    Feb 2021
    Jan 2021
    Dec 2020
    Nov 2020
    Oct 2020
    Jul 2020
    Jun 2020
    May 2020
    Apr 2020
    Mar 2020
    Dec 2019
    Nov 2019
    Oct 2019
    Sep 2019
    Aug 2019
    Jun 2019
    May 2019
    Apr 2019
    Mar 2019
    Feb 2019
    Jan 2019
    Dec 2018
    Nov 2018
    Aug 2018
    Jul 2018
    Jun 2018
    May 2018
    Apr 2018
    Mar 2018
    Feb 2018
    Dec 2017
    Nov 2017
    Oct 2017
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015
    Jun 2015
    May 2015
    Apr 2015
    Mar 2015
    Feb 2015
    Jan 2015
    Dec 2014
    Nov 2014
    Oct 2014
    Sep 2014
    Aug 2014
    Jul 2014
    Jun 2014
    May 2014
    Apr 2014
    Mar 2014
    Feb 2014
    Jan 2014
    Dec 2013
    Nov 2013
    Oct 2013
    Sep 2013
    Aug 2013
    Jul 2013
    Jun 2013
    May 2013
    Apr 2013
    Mar 2013
    Feb 2013
    Jan 2013
    Dec 2012
    Nov 2012
    Oct 2012
    Sep 2012
    Aug 2012
    Jul 2012
    Jun 2012
    May 2012
    Apr 2012
    Mar 2012
    Feb 2012

    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term
    Environmental Regulation
    Last 100 Years
    Real Estate Taxation


    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • Votersway Blog
  • Watt's Up With That


  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]