Tuesday, November 23, 2004

So far, US policy toward Beijing is "Whatever China wants, China gets". One wonders if the Bush administration will be taking this bit of advice to heart?
In a mark of China's growing economic confidence, the country's central bank has offered blunt advice to Washington about its ballooning trade deficit and unemployment.

In an interview with the Financial Times, Li Ruogu, the deputy governor of the People's Bank of China, warned the US not to blame other countries for its economic difficulties. . . .

�The appreciation of the RMB will not solve the problems of unemployment in the US because the cost of labour in China is only three per cent that of US labour. They should give up textiles, shoe-making and even agriculture probably.

�They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.�
We not only hear this talk from the People's Bank of China; we hear it from American economists as well. Can the US simply concentrate on aerospace and scientific instruments and specialized industrial machinery, give up on consumer goods and agriculture, and move toward more balanced trade?

That is the dream of both China and the liberal economist -- and it is a pipe dream.

If one organizes goods by principal SITC code, one finds that so far in 2004 the US is running a trade surplus in
[1] a handful of high-technology (and a few not so high-tech) manufactured goods: airplane parts, airplanes, chemicals-cosmetics, chemicals-dyeing, chemicals-fertilizers, chemicals - n.e.s., chemicals-plastics, printed materials, pulp and waste paper, scientific instruments, spacecraft, specialized industrial machinery;

[2] agriculture: animal feeds, cigarettes, corn, cotton, hides and skins, rice, soybeans, tobacco, wheat; and

[3] minerals: coal, crude fertilizers/minerals, gold (nonmonetary), metal ores (scrap), mineral fuels (other).
The balance on each category of goods in which the US has a comparative advantage is:
High-tech goods: +$40.4bn
Agriculture: +$20.6bn
Minerals: +$1.1bn
For a little context, consider that the US balance on clothing this year is -$50.7bn; on footwear, -$12.3bn. In 2004 the United States is spending its entire comparative advantage on clothes and shoes. And that assumes the US contines to be a major exporter of raw agricultural goods. If the US gives this sector up as the Chinese and the liberal economists urge, then the country can't even afford it's imported clothing.

Perhaps you think this analysis is a bit unfair? Let's take in the entirety of US trade for 2004. Here are the balances by principal end-use category:
Foods, feeds and beverages: -$5.3bn
Industrial supplies: -$148.2bn
Capital goods: -$6.4bn
Automotive vehicles, etc.: -$103.2bn
Consumer goods: -$197.0bn
Other goods: -$9.4bn
Services: +$37.1bn
In short, the US has a small services surplus and is in near-balance on foods, feeds and beverages; capital goods; and other goods. Yet the country is wildly out of balance on industrial supplies; automotive vehicles; and most of all, consumer goods. Clearly, if the US is going to even begin approaching balance (nobody think the US will actually achieve balance, nor must it do so), the balance on vehicles, industrial supplies and especially consumer goods is going to have to change. Don't give me a bunch of pie in the sky about how the US is going to boost exports of specialized industrial machinery 60% (to pay for footwear) or nearly double exports of plastics (to pay for furniture) or double exports of airplanes and airplane parts (to pay for TVs) or more than triple exports of scientific instruments (to pay for clothing) -- because that's what it is going to take to address just the most egregious imbalances.

If the US is giving up completely on manufacturing consumer goods, then it is next to impossible for the US trade deficit to approach balance. If the US doesn't dramatically ramp up the manufacture of industrial supplies -- e.g. computers, pharmaceuticals, industrial machinery -- and automobiles, then it will indeed be impossible.

"Easily balance"?? There will never be enough world-wide demand for airplanes, satellites and travel services to pay for all the clothes, shoes, TVs and furniture Americans import. Believe it.

UPDATE: Apparently the US won't be exporting a surplus of airplanes after all. Li in fact knows as much since Chinese airlines are increasingly buying Airbus planes anyway! "Easily balance" . . .

1 Comments:

At 6:33 AM, Blogger Mark said...

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