China and the Trade Deficit: Whose Fault Is It?
Right now, we have a high-level delegation in China discussing our trade deficit with that country. But what is it we expect China to do? How do we expect them to fix our problem?
One of the issues is the Chinese government's fixing the value of the yuan to the U.S. dollar. The assertion is that the yuan is undervalued, so China is selling to us on the cheap. So let's say a widget costs 9 yuan to produce, and the Chinese sell it to us for 10. Let's also assume that the yuan is pegged at 10 to the dollar. (I'm making up these numbers.) So we get the widget for a dollar. But the yuan is really undervalued, and should be, let's say, 8 for a dollar. So the widget should have cost us $1.25. Essentially, the artificially depressed yuan valuation just resulted in the Chinese' giving us 25 cents. What was the problem again?
Well, the reason the yuan's depressed valuation is considered a problem is that it increases our trade deficit with China. Well, if it weren't China, it would be someone else. If a nation has a trade defecit, it means that it is buying more than it is making. If we were not buying more than we are making, the value of the imports we bought would have to be offset by the value of the exports we sold. So whose fault is this, anyway?
Look in the mirror, folks. Let's assume that our per capita GDP is $100,000. (Again, I'm making these numbers up for illustration only.) If we have a per capita trade deficit of $1000, where does that extra $1000 come from? We did not make it, or our per capita GDP would have been $101,000. No, that $1000 comes from debt.
Our trade deficit is a direct result of our willingness to go into debt. Nothing China does can fix that.
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