from Follow the Money

The real winner from the United States’ current trade with China …

October 16, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The Wall Street Journal (oped division) says no one benefits more from the modern China trade than America’s poor, who get access to cheap, well-made Chinese goods.  

Alas, they pay a bit more for oil too.  And increasingly they pay more for rent.  Median real wages aren’t rising at a very impressive clip.  I suspect the Journal's oped page is only looking at one side of the ledger. The surge in imports from China hasn’t exactly corresponded with a surge in real living standards … at least not for the median worker.  Though maybe they would be doing even worse but for China's efforts to keep Chinese exports cheap by holding the RMB down.

I would bet that the real winners from the modern China trade are folks the Journal's oped page ought to know well: Their friends over on the Street.

We don’t have data (yet) on how much debt the US sold to China between the middle of 2005 and the middle of 2006.    We do, though, have data on US debt exports to China from the middle of 2004 to the middle of 2005. 

It is pretty clear that what might be termed (with apologies to Jagdish Bhagwati) the Wall Street debt-exporting complex are every bit as big winners from the current China trade as are US consumers – at least those US consumers who are using all their savings from a Chinese made DVD player to fill up their SUVs.

After all, China is a far bigger source of demand for US debt than for US goods.


 In fact, exports of Treasuries topped US exports of goods from mid 2004 to mid 2005.   As did exports of Agencies (mostly asset backed securities – the Chinese don’t seem to be afraid of a bit of duration).   The scale on the following graph -- incidentally, goes from zero to ninety.


This data -- which comes from the BEA and the Treasury's survey of foreign portfolio holdings -- is now a year old.     But on the trade side, the story hasn’t changed much.  US exports to China over the last four quarters were $48.3b – a nice jump from $36.3b.    US imports from China rose from $220.6b to $261.5b.  And their isn't more recent data on US exports of debt of comparable quality.

More importantly, the correlation between the deficit in the United States trade in goods with China and US exports of debt is a –in truth – a false correlation.    It just so happens that the US goods deficit is close to China’s global current account surplus and to its overall reserve growth.    So the bilateral data matches the global data.  But the global data is what counts.  Some of the dollars China earns selling goods to the US are spend on imports of natural resources.  But then again, some of the euros and dollars China earns exporting to Europe are invested in US debt.  

Nonetheless, I suspec that today’s Wall Street Journal’s oped almost perfectly represented the basic point of view of the Wall Street debt-exporting complex.   

Stagnant real wages in US manufacturing?   Not a concern.  Not even worth mentioning.

The possibility that China's export succes might have something to do with the PBoC's determined efforts to hold the RMB down?  Most certainly nothing worth worrying about.  

Imbalances?   Not a concern. 

At least not so long as Wall Street can continue to repackage US mortgages into securities that the PBoC snaps up.  And Goldman (and others) get their cut from China’s domestic financial liberalization.   Too bad (some) of their profits are still taxed here in the US …

To be fair, the US Treasury -- not just Wall Street -- benefits from Chinese demand for US debt.  But the Treasury (At least its top officials) also worry about about the political fortunes of the Republican party in places like Ohio.   I honestly think Tim Adams cares about imbalances.  But even if he didn't he couldn't come out and defend China's de facto peg on the grounds that it lowers the Treasuries borrowing cost, no matter who else in the US gets hurt.

I am all for trade.   But I do think the peculiar nature of the United States trade with China raises concerns.    From mid 2004 to mid 2005, the US sold about five times as much debt to China as it did goods.    That is just one country.  But it is symbolic.  Overall, the US exports about as much debt as it does goods. 

That is fine so long as it lasts.  And it already has lasted a bit longer than I would have expected. But it cannot last forever. 

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