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We think of our trade imbalance as a bad thing. Looked at another way, China is paying US workers to take vacation
Trade disputes with China have been heating up lately, but there really is no reason for the hostility. Essentially, China's government is saying is that it has no better use for its money than subsidising the consumption of people in the United States and other wealthy countries, by propping up the value of the dollar. That may seem surprising since per capita income in China is less than $8,000 a year, while it is over $45,000 a year in the United States, but if this is what China's leaders insist, who are we to argue?
But this is raising objections from the United States and other wealthy countries, since Chinese imports are displacing domestic output and thereby costing jobs. But it need not be this way, if governments in the United States and other countries were more effective in managing their economies.
Economic theory predicts that capital flows from rich countries with slow-growing labour forces to poor countries like China that have relatively little capital but rapidly-growing labour forces. The logic is that capital draws a better return in China than in the United States, so it should flow in this direction.
However, for the last decade, capital has gone massively in the opposite direction. Relatively poor countries like China have sent a huge amount of capital to the United States, buying up government bonds and other assets. The purchases of dollars has led to a rise in the value of the dollar, which makes US goods less competitive in world markets. As a result, the United States exports fewer goods and imports more, creating a massive trade deficit and displacing millions of workers in US manufacturing jobs.
But this need not be a bad thing. In effect, China is subsidising its exports to the United States. This is very generous of the Chinese government, since the United States can take advantage of China's generosity to enjoy a higher standard of living. Currently, our deficit with China is equal to 2% of GDP. This means that China is handing us goods and services that are worth roughly $280bn a year more than the value of goods and services we give them in exchange.
While this displaces a large amount of domestic production, we can ensure that the displacement does not result in unemployment by simply shortening working weeks. If everyone's working week was shortened by 2.0% (the equivalent of one week per year of vacation), we could keep the workforce fully employed even in the case of reduced demand.
This could be accomplished by having the government pay people to work shorter working weeks; in effect, paying unemployment benefits to cover a reduction in hours. This would spread the pain over many workers, rather than forcing a portion of the workforce to be completely unemployed. In this way, China could effectively subsidise the vacation of tens of millions of workers in the United States and elsewhere.
This may sound like a bad deal from China's standpoint, but it is a deal they insist upon. They have sometimes raised the question of whether they can expect to have debt to the United States lose value as a result of a falling dollar. The United States should take away this uncertainty.
China absolutely will lose money on its investments in government bonds. It is buying short-term bonds that pay almost no interest and longer-term bonds that pay less than 3.0%. There is literally no one on earth who will pay the same amount for trillions of dollars of these assets. So China's leaders should rest completely assured that when they ultimately sell these assets, they will be getting dollars that are worth substantially less than the dollars they bought. Presumably, the Chinese public will be fine with this situation, since there is no better use for trillions of dollars in China right now.
There is one other important aspect to this story that is worth mentioning. At present, China's trade policy primary hurts non-college-educated workers, since those with college and professional degrees are largely protected from the same sort of competition that manufacturing workers face. It is important to eliminate the barriers that protect doctors, lawyers and university professors from competition with their lower-paid counterparts in the developing world. This way, trade with China would put downward pressure on the wages of professionals, not just manufacturing workers. It would result in lower prices for medical care and the other services provided by these professionals, leading to a boon to consumers and the economy.
This could lead to even larger trade deficits, but if China and other countries want to subsidise our consumption, then this is their choice. A larger trade deficit would simply lead to larger losses for China on its dollar holdings, but that seems to be what its government wants.
So, we need not be hostile to China over its desire to give money to American consumers. An effective policy of work-sharing, like the one in Germany, can ensure that China's generosity leads to longer vacations, not unemployment. We should also take steps to ensure that our highest-paid workers are subjected to the same competition from China as our manufacturing workers.
And, in order to eliminate their uncertainty on this issue, we should assure the Chinese people and their government that they will be repaid in lower-valued dollars. However, if China's government thinks the best use of its money is to pay for longer vacations for workers in the United States, there is no reason for us to be upset.
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1 December 2010 1:11PM
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China is paying US workers to take vacation
.which leads us to say that China is financing these massive wars of aggression and therefore allowing [perhaps not too indirectly] Washington unfettered meddling wherever they please
however the US Treasury doesn't seem to be thankful anyway.
1 December 2010 2:38PM
Just a little question Dean, what happens if the Chinese decide they need their billions, and stop propping up the dollar?
1 December 2010 7:00PM
China's policy of currency manipulation albeit similar to the US policy of currency manipulation [otherwise known as QE2] is in principal the same as an import tariff or export subsidy. Well surprise surprise, almost every modern industrialised nation has in its development stage imposed these very same measures [tariffs atc] in order to protect and nurture their burgeoning industries. Especially the UK in the 17th and 18th Centuries until the mid 19th C once the industrial revolution had made the UK the cheapest and most efficient producer by far at which point Britain conveniently adopted 'free trade' and the U, who were serial users of tariffs from the days of Alexander Hamilton onwards. So what is this whining we constantly hear from across the atlantic? A severe case of 'do as we say' and 'not as we do'. Otherwise known as economic imperialism.
1 December 2010 10:25PM
Never trust a man who wears a beard.
2 December 2010 1:32PM
Very funny Mr. Baker! What is even more ludicrous, is that the Chinese are financing the U.S. in their quest to build more military bases in the oil rich regions of the world, where they will control the flow of this dwindling resource, and strangle China by withholding needed energy.
2 December 2010 6:20PM
"...US policy of currency manipulation [otherwise known as QE2]"
Don't be absurd.
A policy designed to stimulate domestic demand is not currency manipulation. If a country does not have a large trade surplus vs. the US it will not be negatively affected. The US did not ask the Chinese to peg their currency to the dollar - quite the opposite - and the Chinese are responsible for any negative effects of doing so.
2 December 2010 7:03PM
""...US policy of currency manipulation [otherwise known as QE2]"
Don't be absurd.
A policy designed to stimulate domestic demand is not currency manipulation."
It's absurd if you think that this policy of QE2 is for anything other than providing fiat money for casino bankers to speculate on a one way bet on foreign assets, because the commercial arms of those banks sure as hell are not going to waste much energy pumping money into a moribund US economy when they see a one way bet on a currency play in China, Brazil or anywhere BUT the USofA! When you can put down $1M to bet $100M on the appreciation of the Ruan in order to make a killing courtesy of the Fed you don't bother with making pennies lending to Main St. Or did you actually think this really was going to benefit anyone other than the banksters?!Now that really would be absurd...as if you hadn't been watching the unfolding sordid transfer of wealth out of the public purse into the baksters pockets these last 2 years..tsk tsk
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