Should We Worry About China-U.S. Trade?
Politicians are missing the point in their trade rhetoric.

By Donald J. Boudreaux, Ph.D.
Business & Media Institute Adviser
April 26, 2006

     Chinese President Hu Jintao’s visit to the United States occasioned all sorts of commentary – much of it sound and sensible, but much of it superficial and silly.

     The sound and sensible commentary focused on tensions between China and Taiwan as well as on Beijing’s commitment to respecting intellectual property rights. But as is typical, most of the superficial and silly commentary focused on Chinese trade with America.

     The silliest concern that many Americans – including the Bush administration and many members of Congress – have today about China is that country’s trade surplus with America. It’s true that the Chinese now sell more goods and services to Americans than Americans sell to the Chinese. And it’s true that this excess of U.S. imports from China over U.S. exports to China is called a “U.S. trade deficit.”

     What’s not true is that this situation is evidence of any wrongdoing by the Chinese.

     Neither economic theory nor common sense suggests that country A will or should sell to country B the same amount of goods and services that it buys from country B. To see why, consider that each month you buy more from your local supermarket than your supermarket buys from you. Month after month and year after year, your trade with your supermarket is ‘unbalanced’; you run a trade deficit with it.

     Does this ‘deficit’ evince wrongdoing by your supermarket? Does it drive you ever more deeply into debt with your supermarket? Does it portend future economic disaster for your family? Of course not. You run a trade deficit with nearly every merchant you deal with – your supermarket, your dentist, your dog groomer. Each of these merchants runs a trade surplus with you. And no one loses sleep at night because of this arrangement.

     Countries are no different. Just as we do not expect any two persons to have “balanced” trade with each other, we have no reason to expect any such bilateral “balance” of trade between any two countries. Indeed, it would freakish in the extreme if any two countries, especially ones that differ so much in wealth and population as do the U.S. and China, were each year to sell to each other the same amount of goods and services.

     Of course, the U.S. runs not only a trade deficit with China; it runs a trade deficit with the whole world. But this fact isn’t worrisome.

     Ask: why do foreigners willingly ship more goods and services to the United States than they demand in return? The answer is that foreigners find America to be an astonishingly attractive place to invest. To invest in the U.S., however, requires dollars. Foreigners get these dollars for investment by buying fewer goods and services from Americans than Americans buy from them. That is, foreigners save and then invest a large bulk of their savings here.

     This investment creates jobs, improves worker productivity, and increases American economic output just as investment made by Americans. It’s a blessing; it’s a benefit; it’s a ringing testament to the dynamism and strength of the U.S. economy.

     Some critics respond by pointing out that much foreign investment today is not made in the private sector where market forces can be relied upon to use that investment productively. Instead, much foreign investment is in U.S. Treasury Notes – in debt issued by Uncle Sam to finance his budget deficit.

     The Chinese central bank, in fact, buys a great deal of Uncle Sam’s debt. Is this situation troubling? Not to me.

     What is troubling is Uncle Sam’s habit of recklessly spending well beyond his means. Because I have no confidence that this spending is for projects that will yield long-term benefits to the country, I’m sure that our government’s fiscal imprudence will make us poorer than we would otherwise be.

     But I’m not troubled by the nationality of those who lend to Uncle Sam. Government budget deficits are troubling regardless of creditors’ nationalities.

     Let’s not forget that the Chinese don’t determine U.S. fiscal policy. That responsibility belongs to Congress and the president. If Uncle Sam lived within his means, the Chinese would have no U.S. government debt to purchase. Politicians, however, are notoriously hypocritical – and such hypocrisy is on grand parade now in Washington.

     It’s obnoxious, really. Congress and the president spend in ways that make drunken sailors seem like misers. To finance their gluttonous spending, they must borrow dollars. The Chinese oblige by lending them dollars. Then many of these same members of Congress and this president strut about pontificating on how shocked and worried they are that China lends so many of its dollars to them.

     Why does anyone take these people seriously?

Donald J. Boudreaux, an adviser to the Media Research Center’s Business & Media Institute, is chairman of the Department of Economics at George Mason University in Fairfax, Va. He can be reached at dboudrea@gmu.edu.