China's Economic Invasion: One Year Later

The Heritage Foundation ^ | 18. April 2006 | Tim Kane, Ph.D., Marc Miles, Ph.D., and Anthony Kim

[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:

• Mathematically, trade flows are balanced by investment flows. The bigger the trade deficit, the more capital flowing into the U.S. Chinese and other foreign investors prefer to trade their goods for America’s equity and debt. America is seen as the safest, surest investment bet in the world. That’s bad news?

• Realistically, trade represents voluntary exchange. Any “imbalance” is voluntary. As with trade between a consumer and a retailer at the local mall, the two consenting parties each benefit from the voluntary trade of goods for currency.

• Empirically, record trade deficits have coincided with positive economic news in the U.S.: record levels of employment, low unemployment rates, rising pay, and fast GDP growth. The argument that this is a debt-driven party is far less credible than the argument that imports are as economically valuable as exports.

• Pragmatically, much of the trade deficit with China represents re-importation by U.S. firms with factories overseas, such as General Motors, Motorola, and Boeing. Parts leave the U.S. and come back as more valuable assembled products. A 2005 National Bureau of Economic Research study[3]  reported that 90 percent of U.S. exports and imports flow through U.S. multi-national companies, with 50 percent flowing within a single firm. The lesson for Congress is that American companies, not just China, will be injured by protectionism.

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.

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[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.

 

[1rudeboy]

Here ya' go. Knock yourself out.

[hedgetrimmer]

Of course you are ingoring what I said.

The Coast Guard went to the IMO

[1rudeboy]

Prove it.

[hedgetrimmer]

The Commandant came here, before the International Maritime Organization’s General Assembly, and urged the consideration of an international security strategy. Ultimately, a series of intersessional maritime security work group meetings, held at the direction of the Maritime Safety Committee, developed the new ISPS Code as an amendment to SOLAS.

--Rear Admiral Thomas Gilmour, May 10, 2005

[hedgetrimmer]

Now, I would like to turn to our domestic counterpart of the ISPS Code, found in U.S. regulations and standards, codified in Title 33 of the U.S. Code of Federal Regulations, Parts 101-104, better known as the Maritime Transportation Security Act (MTSA) regulations. From its inception, our regulations were written to be harmonized with the requirements of the ISPS Code. In aligning U.S. requirements with international requirements, the Coast Guard considered the best method of implementation would simply be to incorporate the ISPS Code provisions directly into our domestic regulations mandated by MTSA. And that’s exactly what we did. Therefore, a vessel meeting the requirements of the U.S. regulations is deemed to be in compliance with the ISPS Code. --Admiral Thomas Gilmour, May 10, 2005

[1rudeboy]

It is customary, when citing to a block of text while making a point, to include a brief indication of what that point actually is.

[1rudeboy]

So the MTSA was the enabling legislation? You are back to square one.

[1rudeboy]

Check this out. Did anybody realize that on or about 2002, the U.S. Coast Guard commited a coup d'etat and started enforcing international maritime regulations?

[1rudeboy]

I also thought it be best to add this, from Admiral Gilmour's presentation (of which you appear to be fond).

In the aftermath of September 11, 2001, the Commandant of the Coast Guard reaffirmed the maritime security mission to respond to threats posed by terrorist organizations, and our lead role in coordinating with other Federal, State, and local entities; owners and operators of vessels and marine facilities; and others with an interest in our Marine Transportation System. The Commandant came here, before the International Maritime Organization’s General Assembly, and urged the consideration of an international security strategy. Ultimately, a series of intersessional maritime security work group meetings, held at the direction of the Maritime Safety Committee, developed the new ISPS Code as an amendment to SOLAS.
Before each intersessional meeting, the Coast Guard held public meetings in the U.S. and coordinated several outreach meetings with representatives from major U.S. and foreign associations for shipping, labor, and port authorities. We also discussed maritime security at each of our Federal Advisory Committee meetings and held meetings with other Federal agencies with security responsibilities. Throughout this process, the Coast Guard received comments calling for specific threat identification, analysis, and performance standards to respond to maritime threats. Additionally, the domestic and international maritime industry stressed the importance of uniformity in the application and enforcement of requirements, and the need to establish threat levels with a means to communicate threat information to a variety of interest groups.
Because of the vast amount of public outreach and international coordination that went into its development, the Coast Guard considers the ISPS Code to reflect a consensus position, then and now. [emphasis in original]

[1rudeboy]

In light of the block of text I just quoted, do you think that you accurately demonstrated its context when you quoted a portion of the same? Just wondering. LOL

[hedgetrimmer]

1. In aligning U.S. requirements with international requirements

Somewhere there was a mandate to align US requirements with international requirements. WHO made it? HOW is it in the best interests of the American people and the WOT to align our wartime requirments with an international code?

2. the Coast Guard considered the best method of implementation would simply be to incorporate the ISPS Code provisions directly into our domestic regulations.

You are worse than I believed if you defend this usurpation of the Constitution.

[1rudeboy]

I think I remember that you served in the artillery. How would you describe what I've done to poor hedgetrimmer? I forget the terminology. Not FFE, but something else.

[1rudeboy]

Please demonstrate where, specifically, our maritime security strategy was compromised when we went through this entire process, including a 95-0 vote in favor in the U.S. Senate, and a voice vote in the House (unfortunate, because I won't find out how Rep. Paul voted).

And I am truly sorry about catching you misrepresenting Adm. Gilmour's remarks. It's brutal, but on a website such as this one you'd best prepare to be shamed.

[hedgetrimmer]

You told me to prove the involvement of the Coast Guard in the development of the MTSA regulations and I did. NO misrepresentations were made. YOU made the false claim that I didn't know the Coast Guards involvement in the development of the MTSA and its relation to the ISPS and the SOLAS. It's brutal, but on a website such as this one you'd best prepare to be shamed.

[1rudeboy]

You told me to prove the involvement of the Coast Guard in the development of the MTSA regulations and I did.

I asked you to prove what portion of our security was compromised. You replied that the Coast Guard went to the IMO. Thanks for pointing that out, Captain Obvious. I'd really have started to worry if it had gone to NASA.

[hedgetrimmer]

Please demonstrate where, specifically, our maritime security strategy was compromised

Ultimately, a series of intersessional maritime security work group meetings, held at the direction of the Maritime Safety Committee

Why don't you tell us who was in the working group?And in the Maritime Safety committee. Names and countries please.

[1rudeboy]

Now you want me to help you make your argument? LOL

[1rudeboy]

Before each intersessional meeting, the Coast Guard held public meetings in the U.S. and coordinated several outreach meetings with representatives from major U.S. and foreign associations for shipping, labor, and port authorities. We also discussed maritime security at each of our Federal Advisory Committee meetings and held meetings with other Federal agencies with security responsibilities.

[hedgetrimmer]

No you printed some drivel from the Heritage Foundation that misrepresented the origins of the security standards as being adopted from US maritime laws, when the opposite is true.

I showed you that the US code was copied directly from the ISPS. That my friend is a usurpation of the authority of congress and the US Constitution.

[hedgetrimmer]

No, you should prove your assertion that no enemy nations belong to the SOLAS and none participate in working groups where code for our laws is originated.