Mercantilists claim that the huge trade imbalance between China and the US serves as justification for enabling protectionist measures.
Well not so fast.
Even based on accounting, where financial securities are added to the equation, such claims are shown to be unfounded.
Professor Mark Perry elaborates,
``1. In 2009, the U.S. imported more from China ($354 billion) than it exported ($93 billion), resulting in a "trade deficit" of -$263 billion on our "current account" (data here).
``But that is only part of the international trade story, since there are also financial transactions that have to be accounted for, and that deficit on the current account has to be offset somehow, since all international trade has to balance (it's based on double-entry bookkeeping).
``2. The offsetting balance came from the $263 billion capital account surplus in 2009, as a result of $263 billion of net capital inflow to the U.S. from China to buy our Treasury bonds and other financial assets.
``3. The $263 billion capital account surplus exactly offsets the current account deficit.
Bottom line:
Professor Perry: ``There really is NO trade imbalance, when we account for: a) exports and imports of goods and services, AND b) capital inflows/outflows. Stated differently, the balance of payments is always ZERO. We buy more of China's goods than they buy of ours, but then China buys more of our financial assets (bonds and stocks) than we buy of theirs. So in the end, international trade with China, is balanced, not imbalanced." (emphasis original)
My comment: Experts twist facts to provide intellectual cover to populist politics. It's called political hysteria.
Well not so fast.
Even based on accounting, where financial securities are added to the equation, such claims are shown to be unfounded.
Professor Mark Perry elaborates,
``1. In 2009, the U.S. imported more from China ($354 billion) than it exported ($93 billion), resulting in a "trade deficit" of -$263 billion on our "current account" (data here).
``But that is only part of the international trade story, since there are also financial transactions that have to be accounted for, and that deficit on the current account has to be offset somehow, since all international trade has to balance (it's based on double-entry bookkeeping).
``2. The offsetting balance came from the $263 billion capital account surplus in 2009, as a result of $263 billion of net capital inflow to the U.S. from China to buy our Treasury bonds and other financial assets.
``3. The $263 billion capital account surplus exactly offsets the current account deficit.
Bottom line:
Professor Perry: ``There really is NO trade imbalance, when we account for: a) exports and imports of goods and services, AND b) capital inflows/outflows. Stated differently, the balance of payments is always ZERO. We buy more of China's goods than they buy of ours, but then China buys more of our financial assets (bonds and stocks) than we buy of theirs. So in the end, international trade with China, is balanced, not imbalanced." (emphasis original)
My comment: Experts twist facts to provide intellectual cover to populist politics. It's called political hysteria.
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