August 17, 2011

3 Reasons Why The U.S. Should Quit Worrying About China's Trade Surplus (Guest Post)

By Stan Abrams

Well, whether China’s trade numbers bother you depends on who you are, I suppose. If you live in a country that lives in fear of cheap Chinese imports, you have nothing to worry about. Three reasons:

(Chart added by EconMatters)

I. Surpluses Don’t Last Forever

China’s currency is now at less than 6.42 to the dollar, a new high for the RMB. Exports are strong, but as the currency’s value rises, those products become more expensive. Strong trade numbers also bolster the arguments of folks in the government here arguing for continued revaluation, who can say “The export sector is sufficiently resilient to withstand the shock.”

II.  The Value Added Reality Check

This is a recycled, but very important topic. Trade numbers are based on country of origin, using prices that do not include where inputs come from or where profits go to. A new report from the San Francisco Fed (h/t Business Insider) has some great (2010) numbers on this: 
A full 88.5% of US consumer spending is spent on goods and services made in the US, while China gets only 2.7% of American consumer dollars.
Even when you buy Chinese, 55 cents of every dollar goes to services produced in the U.S.
That first sentence surprised me the most. It has nothing to do with added value, but it does destroy the commonly held belief that everything these days used by Americans is made in China. I’ve never really thought about that before, but if I would have guessed, I’m sure my answer would have been substantially higher than 2.7%.

The second part of the quote contains the value added number. I like the simple “55 cents of every dollar” figure, which is easy for anyone to understand.

One last interesting data point. The SF Fed found that there was only one sector where Chinese manufacturers’ share of US consumption exceeded that of US parties: shoes and clothing. For everything else, the “Made in USA” share was higher.

III. The Demand Side in the US

When domestic demand increases, so do purchases of imported products. The US economy doesn’t look so hot at the moment, and since the US government no longer takes the advice of sane economists, there is zero chance for any significant public stimulus. So aggregate demand looks like it will drop. (I think the same analysis generally holds true for the EU, which is also sickly these days and going down the austerity road.)

The extent to which a drop in aggregate demand will translate to lower China imports to the US (or EU) is complicated. Remember that some of the lower-end manufactured products are cheap, and retail outlets like Wal-Mart and Target in the US that sell those products tend to be attractive during economic downturns.

All this being said, the usual disclaimers apply on the political front. Particularly in the US, which is undergoing some incredibly funky political infighting, China remains an attractive bogeyman, especially when it comes to trade, which is often linked to jobs. Short-term numbers can and will be used by folks looking to foment outrage from a frustrated and unemployed public.

About The Author - Stan Abrams is a Beijing-based IP/IT lawyer and law professor. Stan has an M.A. from Johns Hopkins in International Relations, a J.D. from Boston College Law School, and a B.A. from Pomona College.  He blogs at China Hearsay.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

EconMatters | Facebook Page | Twitter | Post Alert | Kindle

From The Web