Back To Our Old Ways On Trade?

This just in from Reuters: U.S. trade deficit widened in September [1].

The U.S. trade deficit widened in September by an unexpectedly large 18.2 percent, the most in more than 10 years, as oil prices rose for the seventh straight month and imports from China bounded higher, a U.S. government report showed on Friday.

The gap in September was $36.4 billion.

In other words, we borrowed more money to buy things made elsewhere. We did that because a few decades ago we started exporting our manufacturing capacity. So now our trade profile looks like this: We export jobs and factories. Then we borrow money to buy more of the things we consume. Borrow, consume, borrow, consume.

How long with this unsustainable situation be able to continue this time? We know what happened last time. So our policy should not be it didn't work so we are doing more of it. We as a country should be capable of learning something.

And look what we exported:

The value of U.S. exports of industrial supplies, such as steelmaking material and gold, rose to $27.13 billion in September.

A big chunk of what we exported was materials for manufacturing things elsewhere!

President Obama is in Asia starting today, visiting Japan, Singapore,South Korea and China. China is the big one, of course, because of our balance of trade problem with that country. One subject of the discussions will be a word that is going to be heard a lot in coming months and years: rebalancing.

Yesterday in his post What Chinese Currency Manipulation Looks Like [2], Eric Lotke wrote about the problem of China keeping its currency artificially "pegged" to the U.S. dollar,

China’s deliberate policy of pegging the Yuan to the dollar makes American imports of Chinese goods artificially cheap and gives American companies opening factories in China an artificial subsidy. That’s good for China but bad for America, and helps explain our soaring trade imbalance with China. An extraordinary 83 percent of America’s non-oil trade deficit is with China. During the downturn, our trade deficit with other countries has been shrinking — but not with China.

So President Obama should insist that China stop this huge subsidy that is distorting trade across the world.

Here is another reason for China to stop this practice: it is keeping the Chinese people poor. Yes, on the one hand Chinese currency manipulation steals jobs from the rest of the world and brings them to China. But on the other hand, keeping their currency low keeps the people who get those jobs from being able to buy things made elsewhere. It keeps the prices on goods made outside of China much higher than market levels.

If China rebalances its currency to market levels the Chinese people's purchasing power would instantly increase. They would be able to buy the things we make, and this would stimulate manufacturing here. This rebalancing would be good for the Chinese people and for the rest of the world. It would help stimulate internal markets there as well as trade with the rest of the world. It would help us rebalance our debts and start earning the money to start paying backwhat we have borrowed.

So this is something China can do with the stroke of a pen to help rebalance the world economy, rebuild our manufacturing sector—providing good jobs here—and helping their own people to be able to enjoy the benefits of a world economy.