In the modern mercantilist view of the world, the U.S. economy would be super strong if “we” produced lots of stuff ourselves and exported lots of stuff to China and other nations, and at the same time, if we imported nothing from them. Imagine a world with only two countries, the U.S. and China, to make this a simple example. In this world, Economic Nirvana would occur if the 1.4 billion Chinese citizens made nothing at all and therefore sold nothing to Americans, and if the Americans in turn “sold” all the stuff it produced to China every year.
If the Chinese produced absolutely nothing at all, what would they be able to “give” us in exchange for the goods and services? We’d be slaving away to make goods for the Chinese all because it made us feel good to share it with them?
No! No! No! Say the mercantilists. We would produce enough for ourselves, and then we would sell the rest to China. But this case is no different. At least now we would feed ourselves (perhaps) but then we will still be working like mad to send stuff to China, and again, what would we get in return?
Suppose that the Chinese gave us little pretty pieces of paper that said, “with this paper you can buy something made in China.” If we used those pieces of paper, wouldn’t we then be back in the non-Nirvana world where we are importing things from China? If we don’t buy Chinese goods with them, perhaps we would be interested in Chinese assets? In either case, those pieces of paper are only useful to Americans if we could use them to buy something of value. About the only people who benefit from an American policy of running perfect trade surpluses are the Chinese who should delight in getting a massive amount of free stuff just because some goofball economist somewhere scared people into thinking trade deficits were problematic.
But Wintercow20, surely there must anticipated consequences from running perpetual ‘trade deficits.’ It is not addressed in this post, but I would appreciate your thoughts. Presumably the US population buys foreign goods in dollars and these surplus dollars go where? Into buying US government bonds? Something’s got to give eventually, right?
Another thing to file away for
one of your bestselling books, Wintercow.
CKR, yes the Chinese get dollars from us, and they have to do something with them. Before the financial crisis, they not only bought treasurys, Ginnie Maes, and both directly and indirectly GMACs. They also bought Cadillacs, Lincolns, and Hummers, and shiploads of commodities.
You ask whether a trade imbalance can go on forever, or a very long time, meaning that they would be shipping us goods and they would be buying none of ours. I guess that could go on for a long time if they could not afford and desire what we have to sell. But between two relatively free trading partners, it would not be a problem except for those individuals who did not enjoy a comparitave advantage.
Two days ago we celebrated the 1987 crash, which some of us attribute to James Baker’s comment about wanting the exchange rate between the Mark and the dollar to be more favorable to us. That unfortunate comment was in the context of an obsession over our current account deficit, which we were running because we were growing and buying fuel for our economy, not just oil, but German machinery. When the stock market recovered, the financial press got off that kick. Let’s just say that when reading Barron’s back pages, I never zero in on our balance of trade numbers.
Now today the Chicoms announced they are, in true progressive form, raising longer-term interest rates. I guess that makes sense if you are a Chicom central banker holding the tiller of the state when responding to the guy in Washington holding his tiller. I guess they have gotten impatient, holding treasurys that yield butkus, while inflate our currency at a two trillion dollar a year rate.