Explain the Economy/China Situation

Factual Questions
1

I’ll be honest, I don’t quite understand what is going on in regards to our (the US) beef with the China.

Does this problem stem from or ‘free/fair trade’ agreements; that we import goods from China without the inflated tariffs that China imposes on our exports? Wouldn’t we incentivize American production if we imposed more tariffs on Chinese goods? I know this would bring all the negative effects state-side (pollution), but wouldn’t it overall be more beneficial. Sure the cost of our goods would be higher, but we’d have jobs AND we wouldn’t be supporting a communist regime.

I believe our trade deficit with China is close to $30 billion now. We are benefiting to some extent from the cheap goods from China, but aren’t we hemorrhaging our wealth when it seems all of it goes in one direction? I mean isn’t that the real problem, that China, with their cheap labor and unfair trading practices, are soaking up the wealth of the world? In the grand scheme of things, is the US economy favoring its own people or China? I know the people in China are living in poor conditions, but its government is very wealthy (in many ways because the people are treated like slaves). Aren’t we just helping them support their slave state?

With the recent embargoes cutting mineral exports from China to Japan and America, does this work in our favor? Does this open the door for Australia (which I am told holds the majority of the world’s precious mineral resources) to become a large player? What about the US? Should we start exploiting our own resources?

Also, I believe the fed is about to print $2 trillion for the banks for the next stimulus. Aren’t we just digging ourselves into the grave more? How could devaluing our currency possibly be a good move at this point?

I’ve thought for some time that America was just waiting for an opportunity… that we were waiting for the people to rise up against their government over there, but it doesn’t look like it will happen. There is such a nationalist fervor that these people are attacking anyone or anything that they think is Japanese:

http://www.thestate.com/2010/10/18/1518232/china-allows-rowdy-anti-japanese.html

Finally… what do we have to offer China? China doesn’t respect intellectual property from other countries and strictly regulates its media and Internet access. Google isn’t even the major search engine in China. What can we do to get money coming in the other direction?

2

It is quite simple. China sells us more than it buys from us. Because of this China is accumulating vast dollar holdings-trillions. They recycle this by buying US Government debt. This is fine as long as the Chinese accept that the dollar will have to decline in value-if they start converting their dolar holdings, they will cause a “run” on the banks.
The US really has no cause to complain-US tax laws have encourage manafacturers to move out of the USA (to China, Mexico, and other low wage countries).
In addition, the Chinese steal a lot of the stuff we sell them (they pirate software, copy entertainment without paying copyright fees, and steal industrial designs which are patented).
All of this goes on because the Chinese don’t adhere to international law.

3

We are upset because China took our advice and started practing capitalism ; only in the same way we did in the 1800’s. Basically screw everyone else and take what you want.

4

The purpose of money is to buy goods. The argument that we are sending our wealth away to China in exchange for cheap goods is silly. The trade disagreement with China is not about tariffs, it is about currency manipulation.
If the Chinese are stupid enough to embargo mineral, it probably won’t hurt anybody other than China over the long term. Two thirds of rare earth minerals are located outside of China, the reason they are currently the only one mining the minerals are they are the only ones desperate enough to pollute their country with this type of mining. If they stopped producing other countries would start and the minerals would cost a little more because other countries have environmental standards. Supply would be low until production ramps up, but the knowledge of extracting the minerals is widely known. If China demonstrates a willingness to use embargoes as political weapons, then international investment will dry up and China will stop growing so fast. Then people will have to find a new country to worry about.

5

I think there are a few angles that concerns about China comes from.

The biggest, I think, is just a vestigial cold-war era desire for an enemy. Some people breathe easier in a black-and-white world where they know who to hate. Politicians can always exploit us vs. them mentalities for cheap support. China is big, it’s new, and it’s relatively unknown, so it’s an easy target.

Another stems form a genuine misunderstanding of economic principles. Some people see economics as a zero-sums game, where if there is a winner, there must also be a loser. They figure if China is succeeding, it must because we are losing.

Some come at it from a human rights/environmental factor, but apart from a few serious activists, I think most people taking this approach are using it as a reason to justify resenting China, not really out of concerns for the problems at hand.

I’m not saying there are not legitimate critiques of China (as anyone who knows me would know), but I think most popular resentment of China is based on ignorance.

6

China doesn’t impose inflated tariffs. They’re using capital controls to manipulate the value of their currency. This is a fairly good short explanation of their controls.

Tariffs could help with the short-term currency manipulations, and that’s why some economists have advocated taking such a stance.

The opposing argument is that a long-running trade spat with China will leave both sides worse off than settling the problem in another way. Long-term, a richer China will be better for all of their trading partners. If they’re richer, they will be able to afford to purchase more goods from other countries. But deciding the best trade policy is a political matter, not a factual question to be answered.

We’re not hemorrhaging wealth. We’re sending them pieces of paper, and they’re sending us real goods.

That paper represents the promise of future goods from the United States. Obviously, there would be a big problem if we defaulted on that promise. But we can fudge a little on the margin.

No.

It’s not a slave state. Incomes are rapidly rising in China due to their industrialization.

I’m not saying their policies are friendly. The Chinese don’t treat their country citizens nearly as well as they treat their city dwellers. They also undervalue their currency, which decreases the purchasing power of the yuan, which makes things more expensive for their people. But their goal is economic growth that is intended to benefit the entire country. They don’t want a country of slaves. They want to turn themselves into a rich country. It’s just that some of their current methods are questionable.

The primary purpose of the next round of Fed purchases has nothing to do with China (the benefit from the trade deficit is an important, but secondary, matter). And it is also not “for the banks”. The reason the Fed appears to want to increase the inflation level back to 2% is outlined in mainstream economic theory. But it would take quite a bit of explaining.

The Fed’s intention is to stimulate aggregate demand. The Fed goes through the banks because they hold assets that the Fed can buy. But if the Fed were to buy assets at over their real value solely in order to boost banks’ balance sheets, it would be engaging in unforgivable incompetence. Eventually, the Fed has to sell its assets in order to pull dollars out of the economy to reduce inflation. If the value of the Fed’s assets drops to nothing, the Fed won’t be able to stop inflationary pressure.

It’s quite possible that the next round of quantitative easing will take a big bite out of the Fed’s holdings. It’s conceivable that Treasury would have to borrow money to give to the Fed. That would be a weird sort of mix of fiscal and monetary stimulus. That would only happen if we were on the road to a genuine economic recovery, so it would be tolerable trade-off. Still, we wouldn’t want it to be any bigger than it has to be.

7

No one has mentioned China’s practice of undervaluing it’s currency in Forex markets. If the Yuan were to float, as do all other major currencies, its value would be higher than the current rate of exchange against which it is pegged. The result is that one dollar buys more yuan than it otherwise would so Chinese goods LOOK cheaper than they really are. This is great for Chinese exports - which is the whole point of the policy.

Ultimately what will happen is that China will develop a huge middle class. That will drive domestic consumption. As that happens, exports will become less and less important than internal demand. This process has already begun but China is still far from being the same kind of consumer driven economy that the US is. So until that happens, China will favor policies that encourage exports - like the undervaluing of their currency.