Monday, June 13, 2005

Your Friendly Neighborhood Chinaman

A short post again as I am short on time. But here’s the twelve month trailing average trade deficit between the US and China.

Now, call me crazy, but something tells me that this deficit exists because the Chinese produce stuff we want and we don’t produce stuff the Chinese want. I mean, what American doesn’t want cheap clothing, electronic gadgets and consumer electronics. But tell me how many Chinese demand “grief counseling” or self-help books or the services of sociology majors and other such products that the US is seemingly only capable of producing?


Josh said...

A very good point, to which I might add, that trade deficits are one of the most useless figures you could possibly track. As long as transactions are voluntary we have to assume that both parties are bettering their position by engaging in the transaction or it wouldn't occur at all.

Captain Capitalism said...

Agreed to an extent. Chronic trade deficits if large enough will take a toll on your currency.

Now here's where I must admit lack of knowledge. Intuitively I want to say I KNOW it could lead to inflation at minimal imported inflation, but the question becomes how do we finance this deficit and to a larger extent the current account deficit. Thus far it's been largely financed by Asian governments building up their dollar reserves. That's all good and well when the reserves are out of circulation and not being spent, but I wonder what would happen if Asia decided to start unloading some of those dollars, they can only be spent here, thus increasing inflation.

Like I said, I hadn't thought it completely through, perhaps somebody with a more intricate knowledge of how currencies, FX and reserves are conducted would be able to provide some insight.

Cenk Sumbas said...

It is controvertial point. I agree with Josh, as far as price is right both side get benefit from trade. US is also saving money while buying from China. On the long run, China will demand some high and US product and deficit will decrease. Best way the finance deficit is US Bonds. If you have strong Dollar (Now we are getting there) you will get your dollars back.

Captain Capitalism said...

Yes, but in the case of China, there's a fixed exchange rate, so the strength/weakness of the dollar v. yuan is irrelevant as far as I can tell.

My specific question is when China or any other country "buys" US bonds is the process;

1. They take Yuan, exchange them for dollars on the market, and then buy our bonds or;

2. Give us yuan and we exchange the yuan for dollars?