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U.S. Trade Deficit With China Grows While China’s Trade Surplus With World Diminishes – Is This Part of China’s World Strategy?
Raymond Richman, 5/5/2012

The International Monetary Fund, whose SDRs (special drawing rights) are a candidate to succeed the dollar as the world’s monetary standard, reported in early April that China’s enormous trade surplus with the world was narrowing. It failed to note that China's trade surplus with the U.S. continues to increase. Is this coincidence or deliberate policy?  The Wall Street Journal hailed the notion that world imbalances were being corrected by market forces. That is in line with its ideology of "free trade" but it ignores the reality that China's trade surplus with the U.S. continues to increase. 

In a recent analysis in the New York Times (5/1/2012), Eduardo Porter, a member of the Times editorial board, citing IMF sources, notes that the Chinese trade surplus had fallen from 10 percent of its GDP in 2007 to 2.8 percent in 2011. The U.S. trade deficit declined from 5.1 percent of GDP to 3.1 percent during the same period. The fact is that the worldwide recession in 2008-09, reduced the exports and imports of every large trading nation creating the impression that trade was being balanced. The IMF did succeed in blunting the increasing demand that China allow its yuan to appreciate to make imports cheaper and exports more expensive. The IMF made it appear that market forces were doing the job of bringing trade into balance. In fact, the effect of the recession was only temporary.

The title page of the IMF publication that caused the stir recites:

IMF Working Paper
Asia and Pacific Department
An End to China’s Imbalances?
Prepared by Ashvin Ahuja, Nigel Chalk,
Malhar Nabar, Papa N’Diaye, and Nathan Porter
Authorized for distribution by Nigel Chalk
April 2012

Abstract

Global imbalances have been a central theme of the international economic policy debate for much of the last decade, prompted by large and sustained current account deficits in the U.S. and counterpart surpluses in China, Germany, and among many of the oil producers. This paper focuses on the current state of the external imbalance in China, examining the factors underlying the post-2008 drop in China’s current account surplus and analyzing the prospects for the external surplus going forward. The paper finds that China’s current account surplus should remain modest in the coming years.

However, despite the fact that China’s medium-term current account is likely to stay below its precrisis range, it is too early to conclude that “rebalancing” has been truly achieved in China. While imbalances do not currently seem to be manifesting themselves as a feature of China’s external accounts, the evidence increasingly points to a rising domestic imbalance as growth becomes increasingly dependent on very high levels of investment.

Meanwhile, while the IMF did not mention it, the U.S. trade deficit with China increased every year from2007 to 2011 except for the recession year 2009 as the following table shows:

U.S. Trade Deficits with China 2002 to 2011(millions of U.S. dollars)

Year                               Year                               Year       

 2002           -103,065     2006           -234,101     2010           -273,063

2003           -124,068     2007           -258,506     2011           -295,456

2004           -162,254     2008           -268,040

2005           -202,278     2009           -226,877

Source: U.S. Bureau of the Census

Senator Schumer and columnist Paul Krugman, a Nobel economics prize-winner, believe our trade deficit with China is the result of its undervalued currency. So does Mitt Romney who has promised if elected president to declare China guilty of currency manipulation. We do not. No one knows what the right exchange rate of the Chinese yuan should be. According to Porter, China’s premier, Wen Jibao, believes the yuan’s value may be at its equilibrium level. We have no reason to doubt it. A number of countries have trade surpluses with China.

We believe that China’s trade surplus with the U.S. is the result not of its undervalued exchange rate but is primarily due to China’s mercantilist policies which discourage imports from the U.S. and encourage U.S. firms to outsource their production to China.  Much of China’s trade surplus is the result of the exportation of those “American” products to the U.S., its best customer.   

Porter himself  believes that China’s currency manipulation is undisputed and was part of its development strategy that led China’s merchandise exports to quintuple from 2000 to 2010. He doesn’t even mention China’s restrictions of imports and subsidies to exports. We intend to correct that omission.

He writes, “The combination of climbing Chinese wages and transportation costs has led American companies, including General Electric and Master Lock, to reassess their global production lines and move some production back to the United States.”  These turn out to be trivial. So far none of the corporations producing cell phones and I-pads and the like, computers, TVs, and hundreds of  high tech products have moved back their production to the U.S.. For every employee Apple employs in the U.S., there are ten employes producing Apple products abroad. The same is true for Dell, Hewlett-Packard, and dozens of other American high-tech firms.

As Porter observes, China’s yuan has actually been rising against the dollar. Factoring in China’s higher inflation, the yuan has gained about 13 percent against the dollar in the past two years. And it has appreciated about 40 percent in real terms since 2005. We do not believe that our trade deficit is due to exchange rate manipulation. In any case, it does not matter why we have a huge deficit with China. The use of our invention the scaled tariff , a single country tariff that varies with the level of our trade deficit, is capable of dealing with any cause of our trade deficit.

The alleged reduction in the Chinese trade surplus is attributed by Porter and the IMF not only to the recession but to China’s increased investment in roads, rail, and other public infrastructure.  

We believe Porter to be naïve in his optimistic view that China’s leaders appear to understand the need to change. We see little evidence that the Chinese Communist Party’s long-term goals have changed. We believe it is only a matter of time before American and other foreign investments are nationalized, with some international dispute like an attempt by China to end the independence of Taiwan.  It is our view that Porter is naïve when he fails to recognize China’s long-term goals which, like the USSR before it, includes economic and military dominance of Asia, the U.S. and Europe.

He and the IMF reveal their naivete when they maintain, “The 12th five-year plan begun last year is centered on the goal of raising family incomes, shifting to an economy more reliant on the production of services and building the kind of safety net that gives the Chinese people the confidence to spend some of their vast savings.” That China would give raising living standards higher priority than its desire to be the number one economic and military power is highly improbable.

If they are right, why do they suppose there has been no tendency for the Chinese to reduce their surplus with the U.S.? Our leaders are in Beijing now begging for China to ease their barriers to imports from the U.S. (Even sacrificing a Chinese dissident who sought refuge in our embassy to show our good will to China!) 

Porter and the IMF believe these reforms would put China on a more sustainable path of economic growth that would increase the well-being of regular Chinese.  Indeed, it would, if raising living standards were a priority. But China, as the Soviet Union before it, puts a new world international ahead of everything. The word “sustainable” is an environmental propaganda term that they apply to every environmental policy however absurd. We believe that free markets are sustainable as evidenced by two centuries of increased living standards. And socialism, especially its inevitable totalitarian direction of the economy, is unsustainable as proven by the demise of  National Socialism and Communism.