Did US corporations “cause” the US-China trade imbalance?

This should be an unnecessary posting, but the topic has become so politicized that it has become hard to discuss without recriminations, and a lot of silly things are being said around it.  In the eagerness to assign “blame” for the US-China trade relationship, those in the it-ain’t-China’s-fault camp, and especially the Chinese press, love to point out that since a significant portion of Chinese exports to the US are from US multi-nationals, it must be US corporate policies, and not Chinese economic policies, that are to “blame” for the trade imbalance.  Bu this position makes no sense at all.

 

I don’t remember what portion of US exports are from US multinationals, but someone on Brad Setser’s blog (which, for those of my readers who don’t already read it, is something you should read regularly) claims that the number is 60-70% of total Chinese exports to the US.  This, he claims, proves that it is the fault of American corporations, and not Chinese policy-makers, that China is running a trade surplus with the US. 

 

Wrong – it proves nothing of the sort.

 

Imagine for a moment that the US suddenly passed a law making it illegal for any US corporation or subsidiary to own assets in China (and assume, unrealistically, that there were no other changes in the political relationships between the two countries).  Would the 60-70% of the Chinese trade surplus with the US immediately disappear?  Of course it wouldn’t.  The production and sale of those goods to the US would continue exactly as before, only now the facilities would be owned by Chinese (or Germans, or Japanese, or Brazilians or anyone else who took over the facilities).

 

Why?  Because the conditions that made it profitable to manufacture in China and sell to the US would not have changed.  Wages in China would still be low, infrastructure would still be solid, credit would still be excessive, and the RMB would still be seriously undervalued.  Meanwhile the US would still be a net recipient of capital, so that US consumption would still have to be higher than its production (i.e.it must run a trade deficit).  And Americans would still buy from China.  When Jones & Company manufactures a widget in China and sells it in the US, they do exactly the same thing that Zhang & Co. would do (ok, perhaps Jones & Co. knows a little more about marketing in the US and Zhang & Co. does a better job of getting a good deal in China, but you get my meaning).

 

China is running a trade surplus with the US in part because it has found itself locked into a currency regime that forces industrial production up without a commensurate increase in consumption.  The national origin of the exporter is irrelevant to the process and only reflects the importance of US corporations (especially in the US market) and the value both countries assign to the US-China relationship.  It does not affect the size of the trade relationship.

 

So does that mean I am in the blame-China camp?  No, because I do not think that the existing trading relationship is a serious problem for the US (although I do think it is a problem for China, as I have written many times before).  Since the US trade deficit is caused, in my opinion, not by the outrageous spending habits of Americans but because of the global excess savings – in most cases caused by specific savings-inducing policies in a number of countries – I do not believe that the question of what will happen when foreigners finally decide that they are “tired” of financing US excess consumption is an interesting question.  For me a better question is to wonder what will happen when China and Japan are “tired” of domestic policies that generate large savings (and so large trade surpluses), or what will happen when OPEC is “tired” of high oil prices.  Many things will happen, and they won’t necessarily result in the collapse of the US empire (which has anyway been collapsing unsuccessfully for nearly 90 years – since the early 1920s if I remember correctly, and most dramatically in the face of the Japanese onslaught of the 1980s).

 

Furthermore, and this may be a little more controversial because it requires some focus on long-term demographic trends, I think the US trade deficit is a necessary precondition for a world which will need to pay for a US trade surplus some time in the future.  The US economy and financial markets sometimes act, and have acted for many years, as a kind of residual that absorbs the various needs and requirements of the global economy in the aggregate – changes in the US force changes in the world, and vice versa.  In Europe, Japan and Russia today, and in China in about five years, we will begin to see a significant deterioration in the dependency ratios (as part of the aging process) that will require very heavy economic adjustments.  It is hard to overstate how dramatic and challenging these adjustments will be, and I frankly am a little pessimistic about the resulting prospect for all four countries.

 

But one thing is almost certain – these adjustments will have to be paid for by liquidating foreign claims, and the only market large enough in which to accumulate these claims is the US.  During this process the US will probably switch from being the world’s largest debtor to becoming a major net creditor in order for these countries to adjust.  By the way this isn’t unprecedented.  At the beginning of WWI the US was, as now, the world’s largest debtor nation.  By the end of the war it was the world’s largest creditor – because the European belligerents liquidated their claims against the US to pay for the war effort.  The adjustment required by aging countries will be far more costly economically than WWI, but fortunately spread out over a longer period of time.