West sucks, East blows

US trade deficit hits all time high

The US trade deficit soared to an all-time high of US$725.8 billion in 2005, pushed upward by record imports of oil, food, cars and other consumer goods. The deficit with China hit an all-time high, as did America's deficits with Japan, Europe, OPEC, Canada, Mexico and South and Central America. The Commerce Department reported that the gap between what America sells abroad and what it imports rose to $725.8B last year, up by 17.5% from the previous record of $617.6B set in 2004. It marked the fourth consecutive year that America's trade deficit has set a record as American consumers continued their seemingly insatiable demand for all things foreign from new cars to televisions and electronic goods. The numbers are certain to spark increased debate in Congress over President George W. Bush's trade policies. Since mid-2000 the country has lost nearly three million manufacturing jobs and Democrats blame the administration's flawed policies of emphasizing free trade agreements.

The US trade deficit with China rose to a record $201.6B last year, the highest deficit ever recorded with any country and 24.5% above the previous record of $161.9B set in 2004. Part of that increase reflected a 42.6% increase in imports of Chinese clothing and textiles, which soared at the beginning of the year after the removal of global quotas. The US also recorded record deficits with Japan at $82.7B. Until it was surpassed by China in 2000, Japan was the country that had the largest trade gap each year with the US. America's trade deficit set records with much of the rest of the world as well. Among those records was a $122.4B gap with the European Union, a $92.7B deficit with the nations that belong to the Organization of Petroleum Exporting Countries, a $76.5B deficit with Canada and a $50.1B deficit with Mexico. The deficit with the countries of South and Central America rose to a record $50.7B last year. A huge 39.4% jump in petroleum imports, which rose to $251.6B, was a major factor contributing to last year's deficit increase. The price of those imports rose to an all-time high, reflecting tight global supplies. The US was forced to import more oil in the fall after Hurricane Katrina caused widespread shutdowns of Gulf Coast production.
(Associated Press 060210)

Quotes from Clusterfuck Nation regarding China's options on handling the trade deficit:

The Chinese can't spend their dollars, because spending them will make them worthless. They only have book value as long as they aren't used. So they are rich, but can't ever use their money.

Consider for a moment if you have 5 million widgets. You price them at $5/ea. There's a world wide market for 500/year. If you sold them as scrap, you'd get a 1/2 penny for each.

How much are your 5 million widgets worth?

The dollars the Chinese hold are worthless, because they can't be spent. If I were in their shoes, I'd be slowly exchanging them for Euros as that's where oil is ultimately going to be traded for. If they hold the dollars then each year, those banked dollars will lose value as the Fed spews them out at ever higher rates. The Euro is showing itself to be a better store of value.

Oh wait, the Chinese are divesting dollars, aren't they?

Don't overestimate the Chinese, they are about to face serious problems of their own. They have built so much excess manufacturing capacity and commercial space that prices of manufactured goods and buildings are falling fast. Electricity demand growth is also slowing fast, down from 17% to 13%.

It is pretty obvious that as the US consumer slows down further and further, China is going to hit the wall and its bubble will burst hard. They will go through a long recession, or at least a very sharp drop in growth that will feel like a recession.

And since it was their huge increase in demand that was at work in the oil markets...well, you get the picture...

The Chinese will likely do what any wealthy nation does when faced with a deep recession/depression. They'll divert resources into defense and start converting factories to making munitions.

Then they'll invent a market for those munitions and find a use for them.

Yes, the Chinese have a GAAP mark to market problem. If they were a mutinational in New York, the treasuries would be "Present Valued" down to a lot less. They functionally cannot even spend the interest they earn. If you cannot spend the interest what is the basis for present valuing? The looniness of American GAAP revealed here.

The Chinese indeed have already hit the wall. Their positive net trade with the US is like working for nothing to the extent of the net trade position. The Chinese must still issue Yuan to pay for the frozen receivable UNLESS it is pure uncollected profit. Might that just be the situation a Confucian tight-fisted Chinese merchant mind would insure they achieve! In that case, the worthless receivable simply does not damage them. indeed it is a superb war asset.

They do have an ace. They could build a better command economy since they still have a loose command economy anyway. Their people do as they are told, an immense asset.

Suddenly, the dead beat customer starts trying to corner the market for essentials on your turf. One might get a bit burned about the whole thing.

Might it be that the net value of the business owning the uncollectable receivable might be enhanced by burning some of the receivable in the right fireplace?

I guess the Chinese argument boils down to this, "The Chinese must continue to accept worthless dollars that they can never spend or else risk devaluing the worthless dollars they can never spend."

I've had the opportunity to do work with Xin Xua News Agency in the past. I wrote software for image manipulation and did some training for them. None of it was anything you couldn't find in a textbook. But I found them to be intelligent, witty and resourceful.

This is the same nation that gave us Sun Tzu and the Art of War, the Great Wall of China, gunpowder and explosives. They maintained a civilization for more than 5 thousand years while Greece and Rome came and went. Europe rose and fell, then rose again. And after all they've accomplished, Americans think of them all as backward peasants.

We accept as truth that a nation that has survived 5,000 years without capitalism is suddenly completely dependant on capitalism, that this nation has no other course left to it.

We accept as truth that Capitalism is the only economic system that a nation can use.

We accept as truth that the US Dollar is the rightful currency of capitalism.

We accept as truth that a nation cannot abandon capitalism without destroying itself.

I don't know that these things are true. It wasn't true for China before 1970. It seems to me that the Chinese acceptance of capitalism may just be a convenience.

If you look at China's hoarding of worthless dollar assets and examine that in light of Sun Tzu, then I agree, that these assets look more like military assets than economic assets. The Chinese cannot use them except to destroy the US economically. There is no other possible use for these dollars. If they spend them, they ruin the US. If they give them away, they ruin the US. If they exchange them for Euros, they ruin the US.

What we've done is handed the Chinese an economic nuclear weapon that will destroy the US if used, and we are asking them not to use it.

No wonder Clinton made nuclear secrets and missile guidance technology available to the Chinese. China already owns the US.

The Chinese have found one small use for a trickling of US funds. They buy US businesses, then shut them down, while diverting sales to Chinese businesses.

Business is War. The US is losing at Business.

Capitalism and Free Market economics isn't the only system in the world.

Who says China has to sell everything they make now? Who says they have to make things at the level they do now? Who says they have to keep making what they are making? And who says they have to market anything?

From a Global Economist's point of view, you are right, because you can't see the other options.

China could do what the US does when times get rough, just mobilize an army and invade another country for their resources. Or more intelligently, simply draft its citizens, arm them with new Chinese weapons and hire them out as a mercenary army to defend oil fields. They don't have to have a lot of experience as they have the capability of drafting and throwing more men into a field than any other nation. And after the dollar is sunk and the US doesn't sell the US goods to wage wars with, the Chinese soldiers could be out there in body armor the Americans would drool over.

America sheds free market capitalism and goes to war when the rich need to get richer - the Chinese could play that game too.