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Democracy & Technology Blog Hu’s Trade Gap?

President Bush’s meeting with Chinese President Hu Jintao today in New York and their newly agreed-to meeting in November in China suggest China is on the White House radar, as it should be. Asian economic policy should be right at the top of the Washington’s policy list (there’s also this small matter of potential North Korean nukes). But why is the White House still obsessing over the “trade gap” with China, browbeating assurances out of Hu to reduce the trade gap by buying more American goods?

Where to start?

First, the trade gap is an accounting identity and implies a capital surplus. We buy lots of stuff from China, send it dollars, and China invests in American assets. The American trade deficit has since the founding of the nation a couple hundred years ago been key to our success. It means for all our exports, foreigners would rather invest in the U.S. than in almost any other country. We most often have “achieved” temporary trade surpluses only in times of deep recession when investment in the U.S. slows and our imports decline. China, in fact, runs a trade deficit with the rest of the world, a fact telling of China’s economic strength, not weakness.

Second, how can we complain about lagging Chinese imports of U.S. goods when we (us, America, the U.S.) prohibit China from buying some of the most advanced made-in-America products — namely, high-end semiconductor capital equipment, fast computers, and other high-tech products? China produces more wheat, rice, and even corn than the U.S. At 345 million metric tons, it makes 30 percent of the world’s steel and is a net exporter. It is quickly becoming an automobile colossus. It is even a key manufacturer of silicon integrated circuits. Where it has not yet caught up is in some leading edge capital equipment markets, one of our strengths. Our policy (1) discourages China from buying expensive U.S. goods, (2) encourages China to buy from other nations, (3) encourages China to develop an indigenous semiconductor capital capability, and (4) does little or nothing to protect our national security because harming key American technology companies hurts our economy and our technological capabilities key to our military and intelligence services.

Third, bilateral trade statistics really are antiquarian in this seamless, globalized world in which we live. Also, the measurements are imperfect: we are better at counting goods and imports than we are at counting services and exports, and since the U.S. is an 80% services economy, our trade deficit will tend to look higher than it is. But even if our measurements were perfect, the idea that trade should balance is wrong. Economies are not built on equilibria but on creativity and growth — that is, disequilibria.

Chinese counterfeiting and theft of intellectual property are real concerns, but supposed currency manipulation and trade gaps are self destructive delusions.

-Bret Swanson

Bret Swanson

Bret Swanson is a Senior Fellow at Seattle's Discovery Institute, where he researches technology and economics and contributes to the Disco-Tech blog. He is currently writing a book on the abundance of the world economy, focusing on the Chinese boom and developing a new concept linking economics and information theory. Swanson writes frequently for the editorial page of The Wall Street Journal on topics ranging from broadband communications to monetary policy.