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China's Economic Invasion: One Year Later
The Heritage Foundation ^ | 18. April 2006 | Tim Kane, Ph.D., Marc Miles, Ph.D., and Anthony Kim

Posted on 04/19/2006 12:56:38 PM PDT by 1rudeboy

One year ago, the chorus of the consensus told America that the dollar’s exchange rate was due to fall in 2005. Under relentless assault from cheap Chinese imports and facing a record trade deficit, the dollar had nowhere to go but down. The influential Economist magazine went so far as to say, “[t]he deficit is unsustainable: sooner or later it will need to shrink, and that will involve a cheaper dollar.” Politicians and pundits predicted economic trauma at the hands of outsourcing. Time has proven them wrong. What the U.S. needed then and needs now is to stick to the reliable keys to growth: low tax rates, deregulation, limited government, and especially free trade.

 

A Dollar – Deficit Link?

The U.S. economy did set two records last year. First, 2005 saw a new record trade gap. Imports to the U.S. exceeded exports by $724 billion, or 5.8 percent of GDP. Second, more Americans were employed than ever before in history, arguing against those who preached doom and gloom.

 

The data continue to support our contention of last May that the trade deficit is not the signal to watch: “This is all wrong... Many economists and the weight of history suggest that the trade deficit, a symptom of investment capital inflows, is a sign of national economic strength.”[1]  Additionally, two papers published last spring pointed out the lack of a historical relationship between currency values and trade deficits.[2] Indeed, despite the widening trade gap, the dollar gained value against other currencies.

 

 

The January 5, 2006, Economist admits that the dollar pessimists “were all wrong.” Yet the conventional wisdom of “trade hawks” is again resurgent, arguing that trade deficits are unsustainable and the dollar cannot hold. Last week, the government reported the third deepest trade gap on record, with imports outweighing exports by $65.7 billion. Current exchange rates, however, appear normal compared with exchange rates over the last few decades.

 

Unless Congress moves from protectionist rhetoric to protectionist legislation, there is no reason to expect the dollar to slide significantly. Trade flows are the “tail of the dog,” as Fed Chairman Ben Bernanke once explained. From time to time the dollar does fall when the world’s investors lose confidence in the superiority of America’s institutions and markets. Sadly, congressional hostility to the U.A.E. port deal was a bipartisan embarrassment and isn’t likely to reassure the world that America is as free and fair as it proclaims. Equally troubling is the Schumer-Graham proposal in the U.S. Senate to place trade barriers on imports from China.

 

The Chinese Invasion

According to the last week’s data from the Department of Commerce, the U.S. trade deficit with China was $13.8 billion in February. In 2005, the U.S. trade deficit with China grew by 25 percent to $202 billion. That amounts to nearly twice the $103 billion bilateral deficit in 2002. The ratio of imports to exports with China is now 5 to 1, perfect for the “Chinese invasion” storyline. The U.S.-China deficit’s growth probably won’t continue, but not because it can’t. Consider these points:

We should cheer the triumph of capitalism and its alleviation of poverty within China, as well as its benefits for American consumers and shareholders. The only point of debate is whether American workers’ wages are suffering due to trade with China, but there is no clear evidence of wages “racing to the bottom.” Instead, China is experiencing a severe labor shortage that is driving wages up rapidly in a “race to the top”—the level of free-market workers.

 

The real dangers to America are not free trade or China’s currency. That’s not to say there aren’t smart policies that should be taken to curb abuses of fair trade, rather that protectionism and currency haggling aren’t part of the smart mix. The real danger is that Congress will try to fix what is not broken and adopt a mercantilist policy of import limitation. Congress would do well to stick to the reliable keys to growth spelled out in The Heritage Foundation’s Index of Economic Freedom: strong property rights, low tax rates, low regulation, limited government, and especially free trade.

 

Tim Kane, Ph.D., is Director of, Marc Miles, Ph.D., is Senior Fellow in, and Anthony Kim is Research Associate in, the Center for International Trade and Economics at The Heritage Foundation.



[1] Tim Kane, “The Brutal Price of a Dollar,” Heritage Foundation Backgrounder No. 1855, May 31, 2005, at http://www.heritage.org/Research/TradeandForeignAid/bg1855.cfm.

[2] See Ibid. and Tim Kane and Marc Miles, “Trade Deficits, Dollars, and China: Wrong Lessons Make Dangerous Policy,” Heritage Foundation WebMemo No. 743, May 12, 2005, at http://www.heritage.org/Research/Economy/wm743.cfm.

[3] A.B. Bernard, J.B. Jensen, and P.K. Schott, "Importers, Exporters and Multinationals: A Portrait of the Firms in the U.S. that Trade Goods," NBER Working Paper No. 11404, June 2005.

 


TOPICS: Business/Economy; Foreign Affairs; Government
KEYWORDS: china; deficit; heritagefoundation; surplus; trade
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To: 1rudeboy
As you can see from your chart, the trade deficit declined markedly from 1986 under Reagan's policies through 1993.

BTW: I would note that the chart's creators are apparently trying to give a skewed impression that production increased only nominally over time...which is not true.

Examine the positive side for IP, Industrial Production note how it is slanted by squishing the dimensions thereto... Whereas the negative side is stretched out dimensionally. Your'e Comparing Oranges and Apples.

Keep in mind, it was our surplus in Manufactures which allowed the U.S. to almost eradicate its trade deficit...despite a serious energy import appetite which only grew larger during the Reagan recovery (even though we were again pumping new oil finds). The economy's thriving only increased the overall thirst for energy, and hence imports for foreign oil and Liquiefied natural gas.

61 posted on 04/21/2006 9:31:08 AM PDT by Paul Ross (We cannot be for lawful ordinances and for an alien conspiracy at one and the same moment.-Cicero)
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To: hedgetrimmer
Security standards for ports are governed by the International Shipping and Port Security (ISPS) Code, which is based on U.S. maritime laws adopted after 9/11. The same law applies to any company operating in the U.S., regardless of its origin.

The U.S. Coast Guard is responsible for overseeing the implementation of ISPS. Every U.S. port has a Coast Guard officer who is the Captain of the Port and is responsible for coordinating all port security. The Customs and Border Protection agency and the Coast Guard, not the owner of the port, conduct security screening on individuals and cargo that enter the port.

Source: Heritage
62 posted on 04/21/2006 9:47:58 AM PDT by 1rudeboy
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To: Paul Ross

Paul, if there really is some kind of correlation between the dollar, trade, and the balance of payments, then I sure as hell want to know about it   So far, we've had a pretty terrific run of huge capital flows into the US with Americans getting rich enough to pay for increased imports of coffee, chocolate, oil, etc., --all this with ever increasing personal wealth.  

Please, tell me your take on what's in store for us.   Do you think the dollar is going back up, the same, or lower than ever before --and what that means for our the current/capital account flows.   If you don't see this run of prosperity continuing into the future, tell us what you think we need to do to make sure it does.

63 posted on 04/21/2006 10:03:08 AM PDT by expat_panama
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To: 1rudeboy


Does this logo seem familiar?

Hint:


64 posted on 04/21/2006 10:06:09 AM PDT by hedgetrimmer ("I'm a millionaire thanks to the WTO and "free trade" system--Hu Jintao top 10 worst dictators)
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To: 1rudeboy
It has to be remembered that the new security requirements are part of a wider United Nations strategy for combating terrorism and should not be seen in isolation.

International Shipping and Port Security (ISPS) Code, which is based on U.S. maritime laws adopted after 9/11

The ISPS Code is part of SOLAS

The Heritage foundation left out a very important piece of information. The UN is in charge of OUR port security. We only comply. In fact the Coast Guards mission is to enforce international treaties-- which could be construed as a conflict of interest with the American people in some sense. In the eyes of the UN, and the Heritage foundation it appears, the UAE as a signatory of the Solas Convention has a perfectly acceptable role in our port security.
65 posted on 04/21/2006 10:23:32 AM PDT by hedgetrimmer ("I'm a millionaire thanks to the WTO and "free trade" system--Hu Jintao top 10 worst dictators)
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To: hedgetrimmer
Do tinfoil helmets provide adequate protection against mind control rays?
66 posted on 04/21/2006 10:52:57 AM PDT by 1rudeboy
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To: 1rudeboy

Why did you do that?


67 posted on 04/21/2006 11:22:46 AM PDT by hedgetrimmer ("I'm a millionaire thanks to the WTO and "free trade" system--Hu Jintao top 10 worst dictators)
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To: hedgetrimmer

I thought I'd prepare you for the shocking revelation that the U.S. Coast Guard enforces the Maritime Transportation Security Act of 2002 (MTSA), which meets and in some cases exceeds the requirements of the ISPS Code.


68 posted on 04/21/2006 11:36:47 AM PDT by 1rudeboy
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To: 1rudeboy
They are implementing MTSA through SOLAS amendments and ISPS code, for your information.
69 posted on 04/21/2006 11:46:50 AM PDT by hedgetrimmer ("I'm a millionaire thanks to the WTO and "free trade" system--Hu Jintao top 10 worst dictators)
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To: hedgetrimmer
Precisely the opposite. Schooled on international law again . . . will you ever learn to actually study what comes-up on one of your frantic Google searches before claiming authority on the subject?
70 posted on 04/21/2006 11:52:26 AM PDT by 1rudeboy
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To: hedgetrimmer
Why did you do that?

He made a pretty good point whether he intended to or not. 

In total sincerity you posted "The UN is in charge of OUR port security. We only comply."  Rudy posted a link to someone, equally sincere, who recommended taping black plastic over the abdomen to help ward off psychic attack.  The point is that sincerity is not enough, and neither is having friends that agree with you.

OK, if you're happy with what rings true for the moment then more power to you --but if you aren't, then some people follow the scientific method to get what they want.  There're lots of ways of going at it--


71 posted on 04/21/2006 11:54:38 AM PDT by expat_panama
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To: jpsb; 1rudeboy
I've had Vonage for about 18 months now. Combined local and long distance dropped from $70-$100 to about $17 per month.

I heard that it has a tendency to drop-out at times, and you definitely need to have an alternate plan in place should you ever have the misfortune of needing to dial 911.

Yes, depending on your cable provider, it can drop out occasionally. Also, if the power goes out, VOIP goes out too, unlike conventional phones. Voice quality is at least as good as conventional. 911 goes to a local emergency number, but is supposed to be treated like regular 911 soon.

72 posted on 04/21/2006 12:15:06 PM PDT by Toddsterpatriot (Why are protectionists so bad at math?)
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To: expat_panama
Here is the representation of truth/reality in my world. (.pdf file, 72 pages).
Granted, that reality has been altered somewhat by subsequent legislative acts and the promulgation of regulations in the CFR (that's Code of Federal Regulations, so all you tinfoilers must find something else to moonbat-around), but I'm not willing to delve deeper for less than $50 per hour.
73 posted on 04/21/2006 12:15:24 PM PDT by 1rudeboy
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To: Paul Ross; 1rudeboy
It just shows that in multivariate situations that one sufficiently positive factor can dominate so as to compensate for other adverse factors.

Fancy talk for a guy who can't read a simple chart.

74 posted on 04/21/2006 12:17:31 PM PDT by Toddsterpatriot (Why are protectionists so bad at math?)
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To: 1rudeboy
Precisely the opposite

Where did the IMO come from? The people of the United States of America, or the United Nations?

All along I have said that international treaties are diminishing our sovereignty as Americans. The MTSA is another example of a rule that Americans should have created without ANY international interference whatsoever, especially since it was America that was attacked.

However, each of the security requirements in the MTSA have been made to align with SOLAS amendments and ISPS code. In other words, instead of acting unilaterally on behalf of the American people, the Coast Guard and our government created a security plan that conforms to the 'standards' of an international treaty organization. That indisputably diminishes US ability to act in individual self interest in time of war.
75 posted on 04/21/2006 4:54:41 PM PDT by hedgetrimmer ("I'm a millionaire thanks to the WTO and "free trade" system--Hu Jintao top 10 worst dictators)
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To: expat_panama
Rudy posted a link to someone, equally sincere, who recommended taping black plastic over the abdomen to help ward off psychic attack

Which was complete gibberish. Yet you find it somehow comforting. How odd.
76 posted on 04/21/2006 4:57:16 PM PDT by hedgetrimmer ("I'm a millionaire thanks to the WTO and "free trade" system--Hu Jintao top 10 worst dictators)
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To: hedgetrimmer
Where did the IMO come from?

Don't you think you should find out before you go off on one of your raving moonbat UNESCO World Heritage Site the-black-helicopters-are-coming-for-my-vitamin-supplements tangents?

You don't even know how much input the U.S. had in establishing the ISPS guidelines.

Moreover, even if the guidelines came from the planet Zod, you haven't even started to establish that the legislative process in the U.S. was somehow influenced or compromised. All you've done is state how you feel about the process. I'm sure there are dollar-lot used-car salespeople out there who actually believe they are selling a fine product, but the rest of us know they are crap, much like the argument you are making.

Some last words: it is not unusual for countries to standardize functions that they have in common. Take international distress frequencies, for example. Another example of those eeeevillll globalists taking away your freedom to die in a flaming plane crash, or merely an example of making it easier?

77 posted on 04/21/2006 5:17:05 PM PDT by 1rudeboy
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To: 1rudeboy
You don't even know how much input the U.S. had in establishing the ISPS guidelines.

Yes I do. You are woefully ignorant of the Coast Guard and its mission.

What legislative process? The Coast Guard went to the IMO and set up the ISPS and incorporated the MTSA into it. No legislator had anything to do with it. NO REPRESENTATIVE GOVERNMENT had anything to do with it. You have such a hatred for America's citizens, it shows in your disdain for calls to restore representative government.
78 posted on 04/21/2006 5:33:13 PM PDT by hedgetrimmer ("I'm a millionaire thanks to the WTO and "free trade" system--Hu Jintao top 10 worst dictators)
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To: 1rudeboy
Some last words: it is not unusual for countries to standardize functions that they have in common

Now you are claiming our port security should be standardized with other countries? Yes, our enemies should know exactly how we secure our ports, the better to work out their plans to attack. So much for the War on Terror.
79 posted on 04/21/2006 5:36:15 PM PDT by hedgetrimmer ("I'm a millionaire thanks to the WTO and "free trade" system--Hu Jintao top 10 worst dictators)
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To: hedgetrimmer; Toddsterpatriot
You have completely gone off your rocker. Thomas.gov is a great website. You can go there and spend some time reading the legislative history of the MTSA. It will direct you to committee reports, transcripts of hearings, floor debates, etc. Then you can come back here and do something other than make a complete fool of yourself.
80 posted on 04/21/2006 5:43:22 PM PDT by 1rudeboy
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