Yesterday it was revealed that the US trade deficit rose sharply in November, to a record high $60.3 billion, an increase of $4.3 billion against the upwardly revised $56 billion in October and also far higher than the consensus estimate of $54 billion. And it was a sharp increase against the $40 billion deficit in November 2003. That caused the dollar to fall roughly 1% against the euro and most other major currencies. It also meant that fourth quarter GDP growth estimates will be sharply downwardly revised. It also started a new round of China-bashing.CNN Money’s Kathleen Hays wrote a article blaming China for the deficit as well as quoting a phony mercantilist study from a left-wing foundation.
But while some of China’s policies can rightly be criticized, the fact remains that they are not to blame for the trade deficit. What is overlooked is the following
1) China has had the currency peg for more than a decade
and it has actually reduced its trade barriers significantly in recent years, so that is hardly the reason for the increase in the US deficit.
2) Not surprisngly given the first point, China has a
almost equally large deficit against the rest of the world, a deficit which has increased just as fast as its surplus against the U.S.
3) The U.S. deficit has in the latest year increased almost as much against the rest of the world as against China. Between November 2003 and November 2004 the deficit against China increased from $10.8 billion to $16.6 billion, a 54% increase, while the deficit against the rest of the world increased from $29.2 billion to $43.7 billion, a 50% increase. In fact, the deficit excluding China in November 2004 was bigger than the deficit including China in November 2003. Many countries including Canada increased their bilateral surpluses even faster than China despite the significant appreciation of the Canadian dollar.
Instead, the blame must be laid on Bush and Greenspan. If you have lower interest rates to negative levels in real terms ( The Fed funds rate is even after the small increases lately at only 2.25% while the CPI has risen 3.5% and asset prices even more) then this will discourage savings and encourage investments. And a country which has lower savings than investments will have a trade deficit (or more strictly a current account deficit). And of course, the large budget deficit and the large dis-savings that constitute has further aggravated the problem.
There is of course a very close relationship with this statistic and the one Robert Blumen recently discussed on this blog.
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China is just as much a problem as we are. We both engage in currency manipulation and neither of us practices free trade, but unilateral “free” trade with China is not a good idea.
Canada’s savings rate appears to be as low as America’s, yet our trade surplus (the lion’s share of which comes from our trade with the US) is growing. Does this not contradict the “…country which has lower savings than investments will have a trade deficit” claim?
What free trade are you talking about? Most US manufacturers cannot freely export products to China. This means we do not have free trade.
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With that being said, China remains only half of the problem. They have embarked on a export-driven growth strategy that drives the flow of trade. Our part of the problem is material as well.
Your simplistic notion that the problem is just currency is an argument that Hayek would never endorse. It’s simplistic and not appreciative of the motives of the economic agents. The reduction of the this problem to simply one involving currency is a failure to grasp Hayek’s thinking in a comprehensive manner. Motive is a key driver. Please do not use this great theoretician for parochial agendas. It does him a great disservice.
I think I had a little light go on inside my head, so correct me if I’m wrong.
I figure the American economy is so unbalanced and bloated right now that its one-off effect on Canada’s economy (through our huge levels of bilateral trade) may have created for Canada an artificial-surplus kind of exception to the rule:
savings < investments = trade deficit
Still, Canada’s record-low savings rate is becoming a worrying enabler for our consumer compulsion. As Canadians watch the plate-spinning trick that’s keeping the US economy from crashing here-then-there-then-everywhere, maybe we’ll manage to clue in fast enough about our own inevitable fate to minimize the damage of our own Great White Recession. Trading our US Treasury assets for gold and then switching to the gold standard would be a good start, I suppose.
Who is familiar with the tale of the Canadian government’s gold sell-off treachery between 1980-2000?
Oopsie. In my haste I actually typed “<” instead of the proper symbol when I mentioned that general rule:
savings < investments = trade deficit
Vanmind, households aren’t the only sector in the economy. There are also corporations and governments. The Canadian government sector has one of the biggest budget surpluses of the western world (Only Norway and maybe Finland has a higher surplus) in sharp contrast to the US situation. Also, Canadian companies are less careful than US companies in using their profits for domestic investments.
It should also be noted that while Canada has a trade- and current account surplus, this is entirely due to its huge bilateral surplus against the United States. Canada has in fact a deficit against the rest of the world.
Thanks, Stefan, for the clarification about government and corporations.
I think I too stated that Canada’s surplus is artificial because of our bilateral trade with the US. Even though our deficit against the rest of the world provides a more accurate picture of our country’s economic health, most here (individuals, government, corporations) have a desperate need to believe that the aggregate surplus (due to the fact that our trade with the US makes up so much of our overall trade) is a sign that “All is well.”
Just like “all is well” in America, I suppose. Oh well, we’ll go down together like friends should…
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