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The Chinese, Trade and the Deficit


Posted: 10/21/2010 4:35 PM

The Chinese, Trade and the Deficit 

Tree got me thinking about cheap Chinese goods and the lack of a level playing field with a recent post. Now, I'm going to start by saying that foreign exchange and trade in not an area I claim any expertise. But it seems that the Chinese represent both a problem and a blessing for the US. The huge trade deficit with China means that the Chinese have to do something with all the dollars they are collecting. Because the US has a huge budget deficit, we can only finance it through more debt, crushing taxes or inflation. Because the Chinese must do something with all the dollars they are collecting, one of their few alternatives is to be a major purchaser of our debt. Wouldn't the US fiscal problems be far worse if the Chinese were not purchasing our debt? 

So there is a real delicate balance between cracking down on China (including their vastly underpriced Yuan) and what they can do to the US both in stopping our exports. The Chinese are the third largest export market for the US. Likewise, if they move away from purchasing our debt, they put even more pressure on taxes and running the printing presses. Now I am on record as believing we must drastically cut government spending but these other factors are obviously important.

So I'm just throwing these thoughts out there to stimulate some conversation without even beginning to believe I have any answers to this conundrum. Just wondering others takes on this subject.

"If you think nobody cares about you, try missing a couple of payments."

Steven Wright

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Posted: 10/21/2010 11:33 PM

Re: The Chinese, Trade and the Deficit 

China is at the right place, the right time and with a government that is oppressive enough to make some hay for the foreseeable future.

Nothing more, nothing less.

Nobody questions China's debt, and we all just assume that they are net buyers of treasuries.  How are they financing things?  Certainly they aren't just taking money off the top of corporate profits and ramming it into infrastructure or whatever, right?  Yeah, right.

So, the question is, how are they buying treasuries, and from where is the money coming?  They cannot keep up this ruse forever.  Eventually either the workers are going to get fed up, or they will find the sea of consumers has dried up.

China is so locked down for statistical observations, it's hard to determine where their government actually stands.

I disagree with the observation of, "Wouldn't the U.S. fiscal problems be far worse if the Chinese weren't purchasing our debt?" question.  They are financing us, but for what?  So we can buy more of the cheap crap?  I liken it to a credit limit for a consumer.  Is the consumer better off because the credit card company increased the line of credit?  Yes, he is.  He gets more stuff.  On the other hand, he's not, because he's maxing his credit line, and the stuff he bought is really just "stuff".  We're worse off because we have buyers.  We spent the money over the past 30 years on nebulous stuff.  China is the World's QVC.

The trade deficit isn't going away anytime soon, simply because they have cheap labor and are oriented more toward industry as a percentage of GDP than we are now.  That can't change until there are actual goods manufactured in the U.S. to export that are greater than China's net.  Good luck with that.

The only way to crack down on China is to become fiscally responsible or default.

China doesn't want either, so they will capitulate, in some respects.  They will buy our bonds, they will keep the engine greased until we get out of this mess.  Otherwise, we'll print a bunch of worthless bills, pay their asses off, and reorient our economy.  They may saber rattle, but the last thing they want is a default.  They have nearly a trillion in treasuries in the game, and they are one of the major exporters to the U.S..  If we fail, they are hurt, badly.  We are oddly, holding some cards in the game still.

China will find it's comeuppance, maybe not tomorrow, but when all these cards play out, you can't be the world's lowest cost provider forever.  Think of it in the Wal-Mart sense.  There will be a day when Wal-Mart isn't the price leader, and they will have to reinvent themselves.  The internet will take care of the Wal-Mart situation in short order, if they simply stick to the low price philosophy.  China will find it's end game in the same fashion, but perhaps with some bullets involved, unless they reinvent themselves also.

Playing fields, in a global sense, change every day, with a human inventing the next thing.  The Chinese playing field will level.
"If you're in a war, instead of throwing a grenade, throw one of those little baby pumpkins. Maybe it'll make everyone think of how crazy war is, and while they're thinking, you can throw a real grenade."-Jack Handey
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Posted: 10/22/2010 6:43 AM

Re: The Chinese, Trade and the Deficit 

Thanks Rant, some very interesting observations on a very complex set of issues. And I find myself in agreement with many of your thoughts I'm really not advocating anything here just looking for some thoughtful responses. There's one thing you said that I find puzzling:

I disagree with the observation of, "Wouldn't the U.S. fiscal problems be far worse if the Chinese weren't purchasing our debt?" question.  They are financing us, but for what?  So we can buy more of the cheap crap?  I liken it to a credit limit for a consumer.

It seems to me that they have few alternatives for all the dollars they have  acquired from their exports. Our trade deficit is the mirror image of a capital surplus. Even though they are our 3rd largest export market, it would be difficult for them to acquire enough of our goods to even things up. Therefore, aren't they compelled to invest substantial amount of the excess in our treasuries. The Japanese took much of a similar problem in the eighties and started acquiring real estate in the US. For our government, if the Chinese were not acquiring a huge portion of our debt they would find it much harder to keep up the spending game.

"If you think nobody cares about you, try missing a couple of payments."

Steven Wright

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Posted: 10/22/2010 8:59 PM

Re: The Chinese, Trade and the Deficit 

Opt, it's a Catch 22.  If China doesn't buy our debt, then we can't spend as much.

China is our second largest import market, we are their third largest import market.  We are in a crisis, they aren't as much.  They are compelled to buy treasuries, that is exactly what I'm saying.  They are artificially propping us up to continue to be the major importer of goods.

The object of international trade is to have other countries buy more of your stuff than you take in.  China doesn't really care if we are the exporter, they only care if we are the importer.  They are buying our debt to ensure that we remain an importer of their goods.  They are the creditor, we are the debtor.

If we get fiscally responsible or default, that is very bad news for China.  That is why they will continue to buy our debt and see how this all plays out.  Our cards we have left are, a threat of default, a threat of fiscal responsibility, and a recovery.

As much as China wants to act like they are Communist, their international commerce says a different story.  China is a weird animal.  I don't know how they can actually convince their citizens that there are zones of differing economies.  I thought when Great Britain released control over Hong Kong in 1999, that would be the end of Hong Kong as a commerce point.  China just carved out that portion and kept it pretty much on par.  Taiwan is another example.

Edit to add:  We may be their third largest importer, but we have, in 2010, a trade gap of nearly $173 billion.  Couple that with $900 billion in treasury holdings, and there is the skin the Chinese have in the game.  Take that out ten years, and that's some cash.  The $173b is down from years past about a hundred billion.  So, let's say $250 billion per year in net exports China expects from us, for the next ten years, plus interest from the T's, at a reasonable, say, 2% (yeah, a little high for today's T, but they have old ones, too, so I'm assuming a reasonable average).

What do we get as the net result?  My brain can't even calculate the math.

Yes, they have skin in the game.
"If you're in a war, instead of throwing a grenade, throw one of those little baby pumpkins. Maybe it'll make everyone think of how crazy war is, and while they're thinking, you can throw a real grenade."-Jack Handey

Last edited 10/22/2010 9:16 PM by RantReporter

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Posted: 10/22/2010 10:10 PM

Re: The Chinese, Trade and the Deficit 

A lot of 'macro' stuff that is important and interesting, what I'm curious of and don't really understand is what is The United States 'angle'- for lack of a better term- with our trade policies with China?

No need to rehash the off shoring of our mfg base.   I could go on and on on personal and specific anecdotes of this in my business the last 10+ years.

As they continue to develop their own mfg, they're need for our exports will continue to diminish.  Food and agriculture equipment will always be there, the former being the most important -- no doubt the later will diminish in time as everything else.  

Their populace, still most in poverty, but even at that, with one child policy and no gov safety net (ie pensions) will even be less of a consumer driven economy than even Japan.   They have to have the huge trade surplus, which we oblige. 

But at our own economic destruction, it seems.  Maybe harsh, but  while we need their money with our current deficit spending,  we need jobs even more.  

Who needs who more, right now, is a big question.  But as time moves on, the answer will become more clear.

IMO, from personal experience on a project we lost out on bid.  China isn't fukin around--COMAC C919 -their first airliner due in 2016-- has western co's lining up to help build it.  But is not any joint venture, strictly China.

I met several times with GEAE and their Chinese counterpart on the bid, and they (GE) just happy to have the business.  As are others co's as I read on it.  We're financing it, folks.  

(just a model, but is the real deal-- plenty more if you want to look it up)


Not all that excited about flying in it  myself in 2017, but that's not the point.  Point is, we're not talking about making Huffy's anymore. At what time, or is there ever going to be a time, we make a stand  in what would seem our own, our own people's interest?  Certainly it can't be all about $$.....

Last edited 10/22/2010 10:15 PM by onto2002

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Posted: 10/27/2010 9:47 AM

Re: The Chinese, Trade and the Deficit 

It's not just the cheap labor that is the issue as I had stated in my other post, and comments made in various threads.

It's a combination of punitive corporate and personal taxes, and out of control government spending, combined with excessive regulations that make America a bad place to manufacture products.

Yes, the slave labor is a huge incentive for corporations, but it's also all the various disincentives we have here that are also a major factor in corporate flight in America to more comfortable overseas situations in other nations.

Lastly, Opti is right when he says the biggest threat to the Chinese is fiscal responsibility or default.  I advocate the former, and would love to see this country and it's people have a Constitutional Convention, and pass a Balanced Budget Amendment forcing the drunken cruise ship partiers in Washington to control their outlandish spending habits.

Yah, that would screw the Chinese, and some politicians may not be able to retire millionaires, but it would actually strengthen this country and the middle class by returning more of our dollars into the economy instead of watching it be wasted by our government on pork projects.
So Bigfoot, Megalodon, and a Global Warming Scientist walk into a bar...


Last edited 10/27/2010 10:01 AM by Tree

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