Q: Are we being harmed by a trade deficit?
A: We’ve run one since 1983 yet the economy still has grown. (See table, below.)

Q: Can we compete in foreign trade?
A: Yes. In 2009 we exported $1,554,718,000,000 of goods and services and imported $1,933,347,000,000.

Q: What will the appreciation of the yuan do to us?
A: It will make us poorer because consumer goods from China will be more expensive.

Q: Why are export jobs more important than import jobs?
A: They aren’t. But no one sees the loss of jobs and businesses related to imports.

Q: Won’t the balance of payment/deficits harm us?
A: The Chinese will have to use its hoard of dollars to buy stuff from us and finance our deficit.

GDP scale on Right; Ex-Im on Left. Red=exports, blue=imports, green= balance of payments, tan=GDP

* * * * *

I have been reading a lot about trade deficits, free trade, China’s renminbi (“the “People’s Currency”), and global recovery. Many economists and commentators have targeted the yuan (I like the reactionary term “yuan”) as the villain in this scenario. It’s because the yuan is pegged to the dollar.

Here is the first argument, as framed by Nobel laureate, Paul Krugman:

China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done. … China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive …

Krugman says that arguing with the Chinese will no doubt be futile because they won’t revalue. His solution, referring to a policy of the Nixon Administration in 1971 to erect trade barriers against trade partners:

At this point, it’s hard to see China changing its policies unless faced with the threat of similar action [as in 1971]— except that this time the surcharge would have to be much larger, say 25 percent.

I’ve dealt with Krugman’s argument in another article, “Paul Smoot-Hawley Krugman.” He is dead wrong. It is sufficient to say that his advice would set off competitive devaluations and possibly a tariff war which would be the economic equivalent of WWW III. The net result that if you think we’ve got deflation now (we do), a trade war would significantly accelerate the trend, and kill international trade.

The second argument is that an artificially low yuan gives China an advantage in world trade. By keeping their currency cheap, the price of Chinese goods on foreign markets makes them cheaper to buy. Because of this U.S. exporters are at a disadvantage because U.S. goods are more expensive than Chinese goods because of currency manipulation, and not market factors. Thus we must force the Chinese to let the yuan appreciate to make American exports competitive.

These are false arguments, they are irresponsible and dangerous for Americans, and the end result will be a lower standard of living for Americans. These arguments never look at the unforeseen and unintended consequences of such a policy. They also court disaster.

But Secretary Geithner doesn’t see it that way. Nor does Professor Krugman.

They play a very dangerous high stakes game. … Continue reading Things I Worry About: China, Geithner, and Tariff Wars