Ticking Time Bomb? US-China Trade Deficit Keeps Growing

Sorry folks, this is not going to be a nice read. But it's not my fault.

Well... yes it is my fault! And your fault, too!

Yes, we are very busy. As a nation, we are certainly engaged in a war on terrorism. That our leaders are doing something about this is indisputable. That we as taxpayers have to pay for the bill is indisputable, too. We go to work every day and pay those taxes...

We also have very real personal responsibilities to answer for - like raising our children, and helping each other out in times of need. Yes, on a national level and a very personal level, we are certainly busy.

So why am I going to remind us of another responsibility? Because it has to do with you and your family. If not now, then soon...

CAUGHT WITH OUR PANTS DOWN

Recent fashion has it that kids go walking down the street with their trousers down. Well, we upright adults aren't all that different from them with respect to another issue. We've really let our pants drop on this, and I promise you: If no-one does something about this soon, we will be smacked squarely in the fanny - or worse. So, let's not mince words...

- In 2006 the US-China trade deficit has grown to more than $430 BILLION!!!

- Next year's deficit prediction is $730 BILLION!!!

This said, the US and China hold the world's largest unresolved trade debt relationship.

WHAT IS A TRADE DEFICIT?

It's like we've racked up a 430 billion dollar credit card bill and the people we owe could just be waiting to spring the bill on us. We bought billions of dollars' worth of Chinese-made goods. They buy almost none of ours. In the end, they gave us all this business.

Result: according to ages-old international trade policy, we "owe" China big time - to the tune of 430 billion dollars' worth of business.

WHY DID IT HAPPEN?

Problem is: we're buying more than we're selling. The things we wish to sell are either of no apparent value to most folks overseas, or we sell this stuff at too high a price. They could just as easily make it themselves at home for a much cheaper price.

To exacerbate this:

1. On the consumer side: The majority of Chinese citizens is comprised of rural peasantry, many of whom see no apparent need for our goods.

2. On our side as seller: Costs associated with consumer education and infrastructure to support any goods we would sell to China would be too high for us to bear.

Two matching examples:

1. On the consumer side: If you were a rural Chinese citizen, would you buy a television made in the US if you lived in a mountainous region (signal blockage) whose nearest TV station was 500 miles away (out of range) and you lived in a village that had no electricity? Of course not.

2. On our side as seller: Even if the majority of (rural) Chinese citizens had heard about a television, would they know how to operate it? Hand them a remote, and they may think you are giving them a shiny gift that they could take home to show to the family, ever wondering what it was for. As for the television itself: is there electricity? Does such electricity come in sufficient volumes and steady wattage (no "brown outs) to operate the TV? How about repair or exchange centers for damaged or faulty products?

These are just two of many problems peculiar to opening the China market, and many US manufacturers find these obstacles unattractive, and most importantly, too costly.

Result: As such, little to no effort is made on the US side to sell US-made goods to the China market. Yet something must be done.

WHY DID THIS HAPPEN?

For a socio-historical take on how America led up to this crisis, read here. Otherwise...

China has loads of laborers willing to work for dirt cheap.

(Forget that talk about prison labor doing all the work. While in isolated places the concern over this labor may be justified, for the most part the common folk are just willing to do the work. I lived in China for three years and I saw it first-hand: Chinese folks work hard, willingly, and they work with a smile on their faces.)

Given China's cheap labor, starting about 20 or more years ago some American companies started moving their production operations to China. Either that, or they shut down completely in America, and put their goods' production up for bid in China. This allowed these companies to reduce operational costs, lower risks, raise profit margins, and simultaneously undersell the competition. In the end, everything that China offers supports our form of capitalism.

So, whaddya know? If the first US manufacturer did it, then the others followed suit. Pretty soon, almost everyone was having their stuff made in China. Of the companies that didn't go to China - any of these have their names etched on a tombstone in the graveyard of now-defunct companies that couldn't be competitive.

PROOF

Want proof? Okay. Look at what many used to consider an "All-American" brand: Sears - as in Sears, Roebuck & Co. Those big Sears stores. Yes, that Sears.

OK, now look at what was until recently one of Sears' proudest and highest-selling "All-American" products: theCraftsman tool line.

In the annuls of traditional Americana, if you were a real man or a real woman, you have real tools. And real tools were the Sears line of Craftsman tools. In their day, there wasn't anything better than Craftsman tools. You could abuse them, smack 'em, throw 'em around. But they held up. They were the first "shiny" (chrome plated) tools. Very sharp looking.

They were good. AND - on the rare chance that any Craftsman tool broke, all you had to do was bring it into any Sears store and get a replacement on the spot. You didn't even need to bring a receipt. No questions asked.

That's how good these tools were. Were!

Now, they're not even made in America. There are lawsuits to support this.

The point is: we're not making goods here in America any more. We go to the cheapest place to get them made. Right now that place is China.

And this is where the deficit with China started up.

WHEN DID IT START?

The year 1985 heralded the first year of the appearance of this debt, and it has been racking up ever since at an exponential rate. See the accompanying charts US-China Aggregate Trade Deficit and US-China Deficit - Annual Contribution.

The total is staggering. If you thought the expense of the current War in Iraq was bad, look at this deficit.

SO, WHAT CAN HAPPEN TO US?

Economic blackmail: Possible, but hopefully unlikely: If China wanted to, it could call its hand on our deficit. Some could easily say we have paid for the goods, fair and square. But with all the money we have sent to China, they have invested in upwards of $1 trillion in US-based assets and government securities. Read about that here.

By leveraging both the trade deficit and the many assets China owns on our soil, China could easily destroy the US economy - or at least severely cripple it - if they wanted to.

Severe de-industrialization of the USA: If not already, China's cheap production costs have effected the shutdown much of America's formerly powerful industrial base. Our country is covered with empty factories that once proudly churned out high-quality product. The money we once spent on American goods has been sent to China.

Reduction in US-based jobs: From 1989 to 2003, the US government estimates approximately 1.5 million American workers have been displaced as a result of he China deficit.

WHAT ARE WE DOING ABOUT IT?

Well, not much. In April 2006 US President George W. Bush visited China President Hu Jintao to discuss the deficit (among other things), but he walked back empty-handed. Since then: stalemate.

That Bush is not well known for graceful international diplomacy does not help either.

ON THE BRIGHT SIDE

It seems we are at an impasse of a sort. If both countries were to recognize their respective positions in a decent manner - perhaps acknowledging this situation as a consequence of "just doing business" between trade partners, then eventually the course of events may begin to offer a break in the clouds of an otherwise stormy sea of trade ahead.

Perhaps China will eventually find valuable commodities (or services?) that the US can sell to China, such things that China would otherwise not have. And we could begin evening out the trade imbalance based on that as a start.

Or, perhaps the US and China could come up with an agreement of an inconceivable or previously-unthought-of solution.

LET US "OPEN RELATIONS" WITH ONE ANOTHER

No matter what happens, these scenarios would require patience and mutual understanding, and a mutual commitment to working things out. The US and Chinese people, both as business people and as members of our cultures, have much to learn from each other. We need to recognize and banish old prejudices and suspicions. We both need to stop eyeing each other askance, and face to face each other directly with respect and in open friendship.

Clean the slate all the way.

OPPORTUNITY TO LEARN WITH HONOR

Of the many value principles that China values strongly is the concept of "gaunxi", or "relations". When people meet and establish new friendships, they "kai guanxi" or "open the relations". On the positive side, in business these relations (if handled well) transcend common business contract law and allow the Chinese to business in ways that Americans find inconceivable. They have been doing business this way for centuries, and we as Americans could really learn from this system.

On the other hand, with business arrangements being only as strong as personal relations go, what would happen if such relations turned sour? A big mess could arise.

This is a situation where the American (and in general, western) concept of enforceable contract law could render clarity and provide quick and decisive action before the situation could escalate further.

While personal relations could also handle a situation such a this, usually the time needed for negotiation can become excessive and could just as easily result in a break in relations, whereas a contract agreement would ensure action that at least been agreed upon by both parties.

At least both parties would be able to proceed with honor.

CONCLUSION

Again, respect, openness, recognition of respective strengths that we are both willing to share could be the starting basis for paving the path to resolution.

Pugilistic or exclusionary alternatives to this are absolutely unacceptable, and irresponsible. Between the both of us, we are better than all that.

Let's work it out.

- John

Read John's other articles at: http://www.associatedcontent.com/johnmelendez

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SOURCES:

http://abcnews.go.com/Business/wireStory?id=3465671

http://worldnews.about.com/od/china/a/china_trade.htm

http://www.consumeraffairs.com/news04/sears_craftsman.html

http://en.wikipedia.org/wiki/Craftsman_(tools)

http://www.guardian.co.uk/commentisfree/story/0,,1759488,00.html

http://usinfo.state.gov/ei/Archive/2005/Jan/12-31762.html

The US Census Bureau