Sunday, December 18, 2011

Volume 3 Issue 51: Two-Cent Economics

The Kettle Retaliating Against The Pot?

Who would have thought that the US, the country shouting about China's supposedly dumping practices, is practicing dumping itself?:
China will levy anti-dumping and anti-subsidy duties on certain US vehicle imports, the commerce ministry said Wednesday, a move likely to fuel tensions between the world's two biggest economies. 
The tariffs will be applied for two years to passenger cars and sports utility vehicles with engine capacities of 2.5 litres or more and will take effect Thursday, the ministry said in a statement. 
The decision will affect vehicles produced by General Motors, Chrysler Group, BMW Manufacturing, Mercedes-Benz US International, American Honda Motor and Ford Motor.
But then again, I can't say I am surprised. The US has typically treated every problem they have faced by blaming it on others, and never on themselves. America's trade deficit with China is only one of 88 countries which the US has deficits with. Why single out China?

The US trade deficit is merely a symptom of a much bigger disease. It has been around for the last 30+ years and only in the last decade or so has the US been making noise about it (see Chart 1)

Chart 1
This is because it has started to feel the crippling problems that come with the trade deficit:
THE answer to the basic question is "it depends" and I will let the others describe what the issues are. But I would like to use this opportunity to discuss the fallacy of measuring bilateral trade deficits. 
Consider the iPad. 
According to research by Ken Kraemer at UC Irvine, the component parts of the iPad are imported to China from South Korea, Japan, Taiwan, the European Union, the US and other places for final assembly. None of the component parts are made in China: it's only role is assembly.  
- Hal Varian, Chief Economist at Google
When are trade deficits not a problem?
TRADE deficits, or more concretely current account deficits, have to be financed by net capital inflows, and it is really the cause of the deficit and the nature of the financing that determines whether or not persistent trade deficits are harmful. If a country is running a trade deficit mainly because domestic investment levels are very high, the high investment levels should generate enough growth in the economy that the costs of servicing the foreign capital inflow can easily be covered. In that case many years of trade deficits are unlikely to be a problem. 
- Michael Pettis
A COUNTRY'S trade deficit and, for that matter, its current account deficit (the trade deficit plus the income earned by foreigners on their asset holdings in the country net of what the country's citizens earn on the assets they have invested abroad) are never a problem. But they may reflect a problem. To see this, suppose Raul Castro and his brother were finally to die and the country were to normalise relations with the U.S. and move to a market economy. A vast amount of capital would then flow into Cuba, where labour is cheap and vacation beaches are splendid. The equipment, building materials, vehicles, furniture—you name it—flowing into Cuba would all be counted as imports and show up as a huge trade deficit for Cuba. That wouldn't reflect Cubans spending beyond their means. It would reflect something terrific for Cuba—investment that will lead to jobs, higher wages, and higher living standards. The Cubans might have the highest saving rate of any people in the world and they would still run a massive trade and current account "deficit". But the term deficit is loaded because there is no sense in this illustration in which Cubans are going into debt by spending more than they earn.
- Laurence Kotlikoff, William Fairfield Warren Professor at Boston University
In essence, it all boils down to what the US has been importing. It doesn't take a genius to guess what is the reason that a country that has the highest obesity rate in the world spends its money on. No, not just food, but typically, consumption. Over-consumption and over-borrowing is the real problem behind the trade deficit symptom.

It's about time to start pointing fingers at oneself instead of blaming others.

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