Exchequer

About that Trade Deficit . . .

China’s trade deficit, I mean:

China will probably post a trade deficit in March after reporting a surprise deficit in February, as its efforts to stimulate imports take off, Commerce Minister Chen Deming said on Sunday.

Economists also said the country’s shrinking trade surplus and rising imports will help tighten capital liquidity, curb inflation and reduce pressures on yuan appreciation.

In February, China witnessed a trade deficit worth $7.3 billion, the first such deficit since last March. “China will further expand imports this year. Besides February, China will likely see a trade deficit in March,” said Chen, who did not elaborate on the figures, at the 12th China Development Forum in Beijing,.

China runs a trade deficit with many of its largest trading partners, but not with the United States (as you may have heard). The United States has a large trade deficit, but Chinese goods are not the main source of that. The main component of our trade deficit, about half, is oil. With oil and other commodities prices going through the roof (a fact that all the best people will tell you has nothing, nothing at all to do with all those dollars and euros being summoned out of the vasty deep), China is in a difficult situation. A command-and-control economy is a hard thing to manage if the cost of rice gets too high.

Economic trouble for China is not good news for the United States. (Beijing is not the source of our economic problems; Washington is.) For one thing, China helps keep consumer inflation down in the United States by providing us with very cheap goods at a very low profit for themselves. (A command-and-control economy is a hard thing to manage if unemployment gets too high.)

And while the belief that China is “America’s Banker,” buying up all of our federal debt, is a considerable exaggeration, Beijing does buy a lot of bonds. Or at least it has been buying. But big bond funds aren’t buying, OPEC isn’t buying, Japan probably isn’t going to be in the position to be buying in the near future. Even the Fed, which has been buying under the “quantitative easing” program, is supposed to stop buying this summer. Scarcity is a real thing, and at some point the question for Chinese authorities is: another barrel of oil or another barrel of Treasuries? Lots of other potential investors are demanding higher interest rates on U.S. government debt, and so will the Chinese, probably. The marginal barrel of oil looks pretty good by comparison.

Rising interest rates on government debt are a real problem if you are forecasting deficits in the $1 trillion-plus range. There aren’t a lot of trillion-dollar players out there. (China holds just over $1 trillion in U.S. government debt.) Rising interest rates and huge government debts are very big concerns if your economy doesn’t seem to be what it once was, if your government faces a shutdown because the president’s party cannot abide by even the most modest deficit-reduction measures, etc. Congress may vote to raise the national debt ceiling, but the markets get a vote, too. China is putting a brave face on its trade deficit (and, who knows, maybe this really is what Beijing wants; I kind of doubt it), and the United States, being a big commodities exporter (I’ve seen it estimates that the United States accounts for half of the world’s grain exports), stands to profit from higher global food prices. But if that profit is accompanied by economic turmoil in China, then we’re buying trouble for ourselves.

Of course, if our debt-to-GDP ratio were more sane, we would not have to worry nearly as much about Chinese bond buyers or Libyan oil.

Just a thought.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

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