The East Is in the Red
Want an easy way to
eliminate the U.S. trade deficit? Just declare New York City a separate
"entity," with its own balance-of-payments statistics. I can almost guarantee
you that the trade deficit of the rest of the country--call it "mainland
America"--will disappear.
After
all, if New York's numbers were counted separately, we would no longer treat
goods imported into New York as debit items in the U.S. balance of payments.
Furthermore, all of the goods that mainland America ships to New York City
would be considered U.S. exports. True, the goods that New York ships to the
rest of the world would be struck off the export tally, while the goods the
city ships to the rest of the United States would henceforth count as U.S.
imports. But these would be minor adjustments: New York City is basically not
in the business of producing physical objects. So we can be sure that the city
runs a huge trade deficit--probably bigger than that of the United States as a
whole, which is why splitting it off from the rest of the country would give
the mainland a surplus.
Of course, most if not all of New York's deficit in
goods trade is made up for by exports (to mainland America and the world
at large) of intangibles such as financial services and tickets to see
Cats ; and the city also has a disproportionate number of wealthy
residents, who receive lots of income from the property they own elsewhere. It
would not be surprising to find that the city actually runs a surplus on its
"current account," a measure that includes trade in services and investment
income as well as the merchandise trade balance. But if it's the trade deficit
you worry about, splitting New York off from mainland America will take care of
the problem. Nothing real would have changed, but maybe it would make some
people feel better.
What
inspires this idea is China's assumption of political control over Hong Kong,
which removes the last faint excuse for treating China and Hong Kong as
separate economies--and therefore offers a way to make some of the same people
feel better about another trade issue, the supposed threat posed by China's
trade surplus. In recent years, China-sans-Hong Kong--what we used to call
"mainland China"--has been running large and growing surpluses in its
merchandise trade (although its balance on current account has fluctuated
around zero). But China-plus-Hong Kong does not run big trade surpluses.
In the year ending in April, China ran a trade surplus of almost $24
billion--but Hong Kong, as one would expect for a mainly service-producing
city-state, ran an offsetting deficit of $19 billion, reducing the total to a
fairly unimpressive $4.6 billion. China's trade surpluses, in other words, are
largely a statistical illusion produced by the fact that so much of the
management and ownership of the country's industry is located on the other side
of an essentially arbitrary line.
Pointing this out doesn't change anything real,
but perhaps it may help calm some of the fears being fostered by underemployed
Japan-bashers who, like old cold warriors, have lately gone searching for new
enemies.
Professional trade alarmist Alan Tonelson gave a particularly clear statement
of the new fears in his New York Times review of The Big Ten: The Big
Emerging Markets and How They Will Change Our Lives , a book by former
Commerce Undersecretary Jeffrey Garten. (The review caught my eye because some
of it matched word for word a recent speech by House Minority Leader and
presidential hopeful Richard Gephardt.) After praising Garten for taking
seriously the possibility that "the growing ability of the 10 to produce
sophisticated goods and services at rock-bottom prices could drag down the
standard of living of even affluent, well-educated Americans," Tonelson chided
him for imagining that developing countries, China included, would provide
important new markets for advanced-country exports: "[C]onsumer markets in
these emerging countries are likely to stay small for decades ... if they don't
keep wages and purchasing power low, they will have trouble attracting the
foreign investment they require, both to service debt and to finance
growth."
Iam always grateful when influential pundits make such
statements, especially in prominent places, for in so doing they protect us
from the ever-present temptation to take people seriously simply because they
are influential, to imagine that widely held views must actually make at least
some sense.
Tonelson's claim is that as
emerging economies grow--that is, produce and sell greatly increased quantities
of goods and services--their spending will not grow by a comparable amount;
equivalently, he is claiming that they will run massive trade surpluses. But
when a country grows, its total income must, by definition, rise one-for-one
with the value of its production. Maybe you don't think that income will get
paid out in higher wages, but it has to show up somewhere . And why
should we imagine that people in emerging countries, unlike people in advanced
nations, cannot find things to spend their money on?
In fact,
one might well expect that emerging economies would typically run trade (or at
least current account) deficits . After all, such countries will
presumably attract inflows of foreign investment, allowing them to invest more
than they save--which is to say, spend more than they earn. To put it
another way, a country that attracts enough foreign investment "both to service
debt and to finance growth" must, by definition, buy more goods and services
than it sells--that is, run a trade deficit. The point, again, is that the
money has to show up somewhere .
How can a country run a trade deficit when it
has the huge cost advantage that comes from combining First World productivity
with Third World wages? The answer is that the premise must be wrong: When
productivity in emerging economies rises, so must wages--that is, the supposed
situation in which these countries are able to "produce sophisticated goods and
services at rock-bottom prices" never materializes.
I am sure that, despite its
logic, my position sounds unrealistic to many readers. After all, in reality
Third World countries do run massive trade surpluses, and their wages
don't rise with productivity--right?
Well,
let's do some abstruse statistical research--by, say, buying a copy of the
Economist and opening it to the last page, which each week conveniently
offers tables summarizing economic data for a number of emerging economies. We
immediately learn something interesting: Of Garten's Big Ten, six run trade
deficits (as does the group as a whole); nine run current account deficits. Of
the 25 economies listed, 17 run trade deficits and 20 run current account
deficits. Wage numbers are a little harder to come by, but the U.S. Bureau of
Labor Statistics makes such data available on its Foreign Labor Statistics
Web site. There we find that in 1975, workers in Taiwan and South Korea
received only 6 percent as much per hour as their counterparts in the United
States; by 1995, the numbers were 34 percent and 43 percent, respectively.
Surprise! The facts fit the Panglossian economist's vision
quite nicely: Emerging economies do typically run trade deficits, wages do rise
with productivity, and actual experience offers no support at all for grimmer
visions.
But those grim visions
persist nonetheless. For smart people like Tonelson (or Gephardt), this cannot
be a matter of simple ignorance: It must involve ignorance with intent. After
all, it must require real effort for a full-time trade commentator, who not
only writes frequently about the Third World threat but also decorates his
writings with many statistics, not to notice that most of those countries run
trade deficits rather than surpluses, or that wages have in fact increased
dramatically in countries that used to have cheap labor. It is, I imagine,
equally difficult to pursue such a career without ever becoming aware of the
arithmetical necessity that countries attracting big inflows of capital must
run trade deficits.
But
perhaps the uncanny ability not to notice these things is acquired by focusing
mainly on , which does appear to run a huge trade surplus even while attracting
lots of foreign capital. Most of that trade surplus, as we've seen, is a
statistical illusion. But it is still, at first sight, hard to understand how
China can attract so much foreign investment without running a large current
account deficit. Where does the money go?
Auseful clue comes if we look again at the last
page of the Economist and ask which country runs the biggest trade
surplus of all. And the answer is ... Russia . Obviously this isn't
because Russia's economy is super-competitive. What that trade surplus actually
reflects is Russia's sorry state, in which nervous businessmen and corrupt
officials siphon off a large fraction of the country's foreign exchange
earnings, parking it in safe havens abroad rather than making it available to
pay for imports.
China, if you think about
it, suffers from a milder form of the same ailment. The reason those inflows of
foreign capital don't finance a trade deficit is that they are offset by
outflows of domestic capital. In particular, huge sums are being invested
abroad to establish overseas nest eggs for honest Hong Kong businessmen just in
case Hong Kong ends up looking like the rest of China, and no doubt to
establish similar nest eggs for corrupt Chinese officials just in case the rest
of China ends up looking like Hong Kong. To the extent that China does run a
trade surplus, in other words, that surplus is a sign of weakness rather than
strength.
None of this should be taken
as an apology for China's thoroughly nasty government. I fear the worst in Hong
Kong, and worry as much as anyone about the effects of growing Chinese power on
Asia's political and military stability. One thing I don't worry about,
however, is China's trade surplus. Neither should you.
