Wednesday, September 22, 2004

Yesterday some of the regular commenters at AngryBear got into an animated debate trying to answer PGL's question:
why is the United States not exporting more to China as it appears we are suffering from weak exports
In response, here's what the General said:
From 1999 to 2003 US goods exports to China were up 116%, averaging growth of about 21% per year. In 2003 export growth was 28% and so far this year, +35%!

The problem isn't China importing too little from the US, it's the US importing too much from China.
DOR weighed in with some additional data:
In the last two years (eight quarters to end-June 2004), US merchandise exports (NSA) rose 0.6% from the previous four quarters, a rise of $8.28 billion.

Exports to China rose 50.3%, or by $19.27 billion. Yep, 2.3 times as fast as overall exports (sales to Western Europe and Japan together dropped $21.61 billion).

In the past two years, China has been the US most important export growth market, beating even Canada (+3.7% or $12.26 billion).

So, on this point I agree with General Glut. However, I do not get the notion that the US is importing too much from China. If not from China, from which more expensive source should we buy? And, why is the source country even an issue?
DOR (and PGL) frame their questions as determined free-traders and thus miss the larger point on the relationship between the US and China. From 1999 to 2004 (Jan.-July only) US merchandise exports to China are growing rapidly, up +169%. This is even faster than the growth of merchandise imports from China, up "only" 140% over the same period. The problem, of course, is that the US imports over five times as much from China as it exports to the country. That's down from 6.2 times as much in 1999, but still generates massive trade deficits which in dollar terms continue to grow and grow. So far in 2004 the US trade deficit with China is two times larger than its deficit with Japan and over three times larger than the deficit with Germany.

If one thinks the trade balance with China is a problem, then it is impossible to conclude that the US 'does not export enough' to China. The US imports too much.

Now we come to DOR's question: "If not from China, from which more expensive source should we buy? And, why is the source country even an issue?"

Consider how the US "affords" to buy so much from China: gargantuan purchases of US government bonds by the People's Bank of China. Recall that as the US current account deficits have become truly enormous since 2002, foreign capital coming into the US has turned away from stocks and FDI and almost wholly towards bonds, especially government bonds. The US truly will pay tomorrow for consumption today (unless the US decides to inflate away all its debts -- a marked possibility frought with all kinds of danger). For a more involved discussion, see my comments from last Tuesday.

And what does the US buy from China in such amazing quantities? So far this year the two biggest categories, constituting over 80% of US imports from the country, are [1] machinery and transport equipment and [2] miscellaneous manufactured articles. Within category [1] it's really about computers and telecommunications equipment; within category [2] it's furniture, clothing (including shoes) and "miscellaneous manufactured articles" the majority of which I suspect is toys.

So, if the US is to tackle the #1 cause of its current account deficit (recall, it hit 5.7% of GDP in 2004:II), we need to buy fewer of such items from China or buy the same amount at higher prices. Are you going to tell me that the US can't make furniture or textiles (tell that to North Carolina)? That the US cannot "afford" to pay a little more for imported shoes and toys? That our computers are still not cheap enough? That the US cannot even manufacture telecommunications equipment anymore?

Of course, the real wrench in the whole machinery is that the increasingly unequal US economy is becoming desperately dependent on Wal-Mart to lull the American working class into acquiesence. Without ultra-cheap stuff through Wal-Mart (from China), the wool will truly be removed from our eyes and we will see the robber barons as they truly are.

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