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?

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.

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.

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.

“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.

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!!!

Hmmm.

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?