January 10, 2005,
Morgan Stanley’s Stephen Roach was in the news again last week, warning the Wall Street Journal’s Craig Karmin that the U.S. economy will experience “an abrupt correction” if its trade deficit is not reduced. His comments followed his recent New York Times editorial, in which he argued that stronger foreign currencies, and a stronger Chinese yuan in particular, would be the cure for the very deficits that have him so spooked.
To someone not swayed by constant media misinformation about the horrors of trade deficits, Roach’s thinking might on its face seem both counterintuitive and incorrect. Looked at from an individual’s perspective, the very definition of a profitable trade is one in which the individual receives more than he gives. Better yet, the best transactions are not those in which $10 is exchanged for $10 of goods, but instead when exports worth $10 attract imports worth $11.
With the above in mind, it’s no surprise that rich countries very often run trade deficits. As for surpluses, 19th century economist Bastiat reminded his readers that a sure way to achieve a trade surplus would be for the country desirous of one to simply sink goods marked for export offshore. This would lead to a favorable “balance of trade,” all the while insuring that imports meant to be exchanged for the sunken exports would not reach the shores of the country seemingly bent on impoverishing itself.
Returning to China and the yuan, those who worry about trade imbalances are revealing a basic misunderstanding about what causes people and countries to exchange goods, and in the process impart wealth to each other. China’s supposed flooding of the United States with goods is not a sign of economic weakness on our part, but instead one of strength. If we’re flooded with products, it’s because we can pay for them.
Perhaps more importantly, it has to be remembered that we ultimately exchange products for products. Notwithstanding the media hand-wringing about the “kindness of strangers,” no one in the real world is able to import something without exporting something first. In short, trade balances are logically illusory in that we only receive goods and services to the extent that we give something in return.
Stephen Roach regularly frets about the yuan’s “cheap” relationship to the dollar (and the trade deficit that supposedly results), but in doing so he chooses to ignore the reality that since China fixed its currency to the dollar in 1994, total trade between the two countries has risen exponentially; from $10 billion in 1992 to $191 billion in 2003. If trade is indeed an exchange of wealth, then the U.S. and China have for the last ten years been engaged in a mutually beneficial economic relationship in which each country has offered what it does best in return for what the other does best.
David Malpass, NRO Financial writer and chief economist at Bear Stearns, spoke about the above at an October monetary conference at the Cato Institute. He noted that currency certainty between the U.S. and China has helped to make the growth of trade possible. To his way of thinking, while floating or revaluing the yuan wouldn’t necessarily reduce the U.S.’s trade deficit with China, it would create currency uncertainty that would reveal itself through a reduction in the total value of wealth exchanges.
In concentrating on the U.S.’s trade deficit with China, Roach and other economists are missing the truth about it; that it has occurred alongside a trading relationship that continues to grow, and which by definition continues to enrich both parties. More reasoned economic analysis would hopefully acknowledge the myriad benefits that accrue to countries that trade with each other, and would presumably stop all the dangerous talk about the certain “benefits” of an uncertain dollar/yuan relationship.
John Tamny is a writer in Washington, D.C. He can be contacted at firstname.lastname@example.org.