What Endzone fails to realize is that only free trade in which a nation exploits its comparative advantage can create wealth for that society. Anything else just transfers wealth, instead of creating it.
As such, protection can only benefit certain industries, it won't make the country as a whole better off. When a government implements a tariff, for instance, the result is mostly a transfer of consumer surplus to producer surplus. The rest is what economists call a dead-weight loss -- wealth/welfare that simply evaporates due to efficiency losses.
Thats the larger question of free trade.
But pertaining to the US economy currently...
What EZ also fails to see is that there is such a thing as an international financial market -- may want to read about it in the newspaper some time. It is China buying our debt that finances our spending. They don't do this benevolently, but it does benefit both of us. China gets to build up its ForEx reserves which will come in handy if their non-performing loans trigger a monetary crisis. They also do it because it puts downward pressure on their currency which helps their exports. The U.S. has is able to keep interest rates low without weakening our currency too much, because China is propping up the value of our dollar by snatching up all the dollar-denominated assets their central bank can find. These lower interest rates are good for the U.S., and also good for China, because American consumption is key to both economies.
The fundamental economic identity here is :
Savings (private and government) - Investment = Exports - Imports
Since we invest more than we save, we have to import capital from abroad, a capital account surplus. This capital allows us to get loads and loads of credit cards and consume the crap we want to. We import the difference between Savings and Investment through our trade deficit. The reason why we import so much from China is because their savings rate gives them a capital surplus which keeps their currency value low and thus makes their exports cheaper. Meanwhile, nobody wants to buy our goods because our exports are more expensive to them due to the value of the dollar which is propped up by the fact that our investment rate is high.
That is, in a nutshell, where the trade deficit comes from. It is because we are an attractive destination for international investors, and that many Americans are buying homes and other thins --- more than we save. China also is more attractive, but their economy has far higher savings than it does investment. If we want to reduce our trade deficit, we need to improve our savings, and that means both the budget deficit and private citizens. As it works now, China is essentially financing our spending, and the tradeoff of that is the trade deficit. If you want to do something about the trade deficit, we have to either increase saving (good) or decrease our investment (the buying of homes and other things). The latter would crash our economy, and the former seems highly unlikely with Bush running huge deficits.
But you can't really get mad at the Chinese, they are simply enabling (for the short term) our irresponsible domestic policies of maintaining low interest rates, low personal savings, and low government savings all at the same time.
|
