Thursday, April 15, 2004

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Trading with China

Glenn Reynolds links to good news about trade -- exports are growing at a strong clip. According to Reuters:

U.S. exports leapt four percent -- the highest monthly increase since October 1996 -- to a record $92.4 billion, while imports rose 1.6 percent to a record $134.5 billion.

The politically sensitive trade gap with China fell nearly 28 percent in February as imports from that country slipped to $11.3 billion, the lowest level in nearly a year, and exports to China rose 17 percent to $3.0 billion.

The lower dollar appeared to help all categories of exports, as shipments of industrial supplies and materials and autos and auto parts both set records. Exports of consumer goods were only slightly below the record set in November and exports of capital goods, such as aircraft and industrial machines, were the highest since May 2001.

Exports of services, which include travel, also set a record. (emphasis added)

So much for being inundated with a tidal wave of services imports due to outsourcing.

[But what about China? Surely their undervaluation of the renminbi is leading them to run such whopping trade surpluses?--ed.] Actually, as Nicholas Lardy pointed out last month in Congressional testimony, this narrative doesn't hold up:

A reader of the [AFL-CIO's] petition [for section 301 trade sanctions to be applied against China] might gain the impression that Chinese labor costs are so low that foreign goods could not be competitive in China's market. That impression would be fundamentally mistaken. Over the past decade, Chinese imports quadrupled from $104 billion in 1993 to $413 billion last year. Since China joined the WTO in late 2001, its imports have increased by 70 percent. Last year alone, China's imports rose by 40 percent, and China surpassed Japan to become the world's third largest importing country. China's global trade surplus last year was only $25 billion. This surplus was only 1.8 percent of China's gross domestic product, one of the lowest ratios in Asia. In the first two months of this year, imports rose 42 percent over the same period in 2003, and China incurred a trade deficit of almost $8 billion. China's import growth has been so rapid that it has become a major source of economic growth in Japan, Korea, Taiwan, and countries in Southeast Asia. China is also far and away the fastest growing among the large export markets of US firms. The petition makes no reference to the creation of jobs in US manufacturing as a result of our growing exports to China.

Read the whole thing. This page has some relevant charts and graphs.

posted by Dan on 04.15.04 at 10:54 AM


I made this into a post on my blog, but since Drezner's comments get so much more traffic I will post my thoughts and question here in hopes of getting a response:

Does trade deficit/surplus really matter? I know it does politically, we often hear doom and gloom reports about "growing trade deficits," but in terms of free trade economics and wealth creation does this really matter?

I have a major trade deficit with the grocery store in my neighborhood. I spend hundreds of dollars a month there and they buy nothing from me. I have a major trade surplus with the company I work for. They purchase labor from every day, but I don't buy any of their services.

Yet, somehow the grocery store, the huge corporation I work for, and myself are all doing relatively well, despite the existence of massive trade surpluses and deficits between us. Would I be better off quitting my job and instead going to work for the grocery store in an attempt to narrow my trade deficit with them? Or should I start using my free time to grow my own food with the aim of becoming self-sufficient in that respect? Would the company I work for be more successful if it fired all workers that it had a serious trade deficit with? The answer to the above questions is an obvious "no."

In the case of China, we are buying more products from them than they are buying from us, but what are they doing with those American dollars if not using them to purchase American products or services at some point in the future? I'm not sure a trade deficit figure, in and of itself with one specific country, has much of any explanatory power in terms of a nations economic well-being. Am I wrong?

posted by: Paul on 04.15.04 at 10:54 AM [permalink]

This sounds like good news for the US economy, trade deficits can become serious problems if they get out of control. Is there any chance this drop might be just a temporary blip in the market? I don't want to spread doom and gloom here, but does anyone have any idea if this is going to be a long term thing or if its just temporary.

posted by: sam on 04.15.04 at 10:54 AM [permalink]

Trade surplus or deficit matters because it matters what it's getting turned into. If the reminhbi is getting financed by converting dollars into treasuries to spend in low-yeild government spending versus capital expansion of export industries then this will produce a growth depressor.

However I would like to say that while I'm busy teaching so I haven't had a chance to vet Dan's work, that I'm much happier with this round of posts that have occurred since Dan came back from his little trip. Whatever happened there or at home, it was a welcome change.

For a while there I had been getting worried that Dan had converted into a shilling apologist. His more recent posts have been of a much higher quality, and even if I disagree at least it forces me to take time to come up with good counter arguments.

This article is one of those examples. Keep up the good work Dan.

posted by: Oldman on 04.15.04 at 10:54 AM [permalink]

Imagine you had a trade deficit with the whole world, and were borrowing money to support it. If we had a net trade balance an imbalance with one country would not matter, but since we don't it makes (some) sense to focus on the countries we have the biggest defecit with. Of course if we had a great plan to increase our exports to some other country that would be good too, but in the absense of that it pays to look (at least for a start) at countries you have a defecit with and ask why.

posted by: David Weisman on 04.15.04 at 10:54 AM [permalink]

“In the case of China, we are buying more products from them than they are buying from us, but what are they doing with those American dollars if not using them to purchase American products or services at some point in the future?”

Yup, that’s how it works. I expect China’s economy to grow at a brisk pace. Thus, it is virtually certain that its citizens will have to purchase a lot of goods and services from outside its borders. They are, after all, too far behind the curve to supply all of their increasing needs. Economics is not a zero sum game. A prosperous China should lift everyone’s boat throughout the world. It should also discourage this nation from starting wars.

posted by: David Thomson on 04.15.04 at 10:54 AM [permalink]

Finally, some posts on economical topics.

As I see it, the bottom line is: "The ability or the supposed ability to service your debt" ie, weather you go bankrupt or not.

Japans trade surplus did not help the economy/people at all!

China until recently, looked like it was following Japan.

China last devalued the Yuan in 1994 + 13 years they should have an Economical crash around 2007, if not befor then.

People are beginning to question (big time) if America can service it's DEBT in the future. The difference is that America does not have the Big Cash reserves like China and Japan. Instead, It/we have an astronomical DEBT. So, the question could become FACT. What is the Solution? Symple, Cut Government spending and pay off the national DEBT!!!

posted by: Jim Coomes on 04.15.04 at 10:54 AM [permalink]


So what does any of that actually prove? That when the dollar falls in value the rate of imports go down and exports go up? That's news? I had no idea that was so unexpected. :/

As for China's imports, so what? China isn't importing massive amounts of luxury items. They're importing basic materials such as steel. In fact they're importing so much steel that it's affecting the domestic American market. But don't think that'll last for long as the Chinese domestic steel production is growing rapidly.

Frankly I still don't see anything to really be happy about. Is there some fundamental change exemplified by this data or is it the same-old-same-old?

posted by: ed on 04.15.04 at 10:54 AM [permalink]

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