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Letters to the Editor

Responding to
Made in China
by Michael H. Thomson

August Ecklund from Arlington Hts, IL writes:
December 15, 2003
China has become a favorite subject for members of the press and politicians that love to blame others for our economic woes. Just as they did 20 years ago with Japan, they love to cite the growing trade deficit as proof that the US is in danger of falling behind economically and that the government must take action to protect its industries and workers. Then as now, they over estimate potential harm of Japan and China’s economic growth and downplay our own responsibility. Eventually, time caught up with Japan, as it could no longer support a high level of growth and its economy slipped into recession. China is susceptible to the same market forces that affected Japan and every other economy, so time will catch up with China also. The true culprit for the trade deficit is government deficit spending, which requires foreign investment for capital. A trade war or other defensive actions would lead to a loss of capital and have immediate devastating effects on the US economy. Reduced capital would ultimately produce far more layoffs in the US than the trade deficit.

Despite the US’s growing trade deficit, China is a very long way from becoming an economic superpower. True, China’s economy is growing very quickly (it averaged 7.7% growth in GDP from 1998 to 2002) and the success of its economic reforms is impressive. However, the reason its economy is growing quickly is that it is growing from nothing. It is very easy to achieve fast growth when you start at practically zero. In 2002, China’s GDP was $1.2 trillion compared to $10.4 trillion in the US (and $1.44 trillion in France). In 20 years, if everything goes perfectly for China and it maintains its current level of growth (which is unheard of), China will have a GDP of $5.29 trillion. Again, if everything goes perfectly for China (a very big “if”), China’s GDP will need 30 years at an average of 7.7% growth to reach the current US GDP. Are we to assume that the US GDP will not grow at all during that time? Certainly, if the US GDP stopped growing, the slow down would have devastating effects on China’s economy.

China’s economic situation becomes even bleaker when you factor in the size of its population and the government’s goal to maintain social order. With about 1.28 billion people, China’s per capita GDP is about $960 a year. To put that into perspective, Russia, which is not exactly an economic powerhouse, has a per capita GDP of $2,380 a year. The majority of China’s population is still rural peasants and there is a growing income disparity between rural and urban areas. The Chinese Communist Party maintains it legitimacy and the social order in the face of reforms by guaranteeing jobs, pensions and government subsidies. This guarantee causes great inefficacies in the economy and sustains loss-making state owned industry. In short, China is walking a thin line between market reforms and maintaining its social order. These two goals are pulling the country in two separate directions, and at some point, the government will have to choose one or the other. What will happen to the social order when the government bites the bullet and revokes the subsides while allowing companies to begin laying off millions of workers?

Finally, we should not blame China and Japan for our economic problems, because the US trade deficit is not the problem. It is only a symptom of another problem caused by US government deficit spending. In Macroeconomics, the theory of “Twin Deficits” states that when government spends more than it saves, it requires investment capital to make up the difference. In an open economy, deficit spending leads to trade deficits, because a trade deficit literally means receiving foreign capital and goods on credit (if you recall, when the US’s trade deficit with Japan was an issue, the US government was compiling a huge national debt). The draw back is that the American people must repay the debt, which means that the burden for capital falls on future generations. In a closed economy, deficit spending exhausts capital stopping investment and halting economic growth, which leads to unemployment. By taking a more aggressive trade stance with China and Japan, not only will we cut off American companies from potentially profitable markets, we also risk cutting off investment for economic growth. In either case, our own irresponsibility is threatening our present and future economic growth.

Therefore, I agree with one thing you said - it is time to “Wake Up America!” Wake up to the economic harm caused by out of control government spending.

(Economic data is at www.economist.com/countries)

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