The Widening Trade Deficit With China, in an Election Year

America’s trade deficit with China looks like it will exceed $250 billion for 2007. That’s more than the previous record of $233 billion, set in 2006. Is the answer for China to raise the value of its currency, the yuan? Thanks to a surge in recent weeks, China’s yuan ended 2007 up nearly 7 percent from a year ago. That’s twice the rate it appreciated against the greenback in 2006. But that’s probably not be enough to calm American politicians in an election year, whose constituents are understandably worried about their jobs and wages.

Don’t be surprised if in 2008 Congress threatens China with tariffs unless it does more to raise the value of its currency against the dollar, making our imports from China sufficiently expensive and our exports to China sufficiently cheap to close the deficit – and thereby, it’s assumed, save good American jobs. But politicians are wrong if they think a rising yuan is any answer.

For one thing, the trade deficit numbers are deceptive. Much of what we buy from China today we used to buy from Japan, South Korea, and Taiwan. China has been importing more and more parts from these countries and merely assembling them. But because the final goods are exported from China, they’re counted as Chinese. Subtract what’s merely assembled in China and more than half of China’s trade deficit disappears.

China is also sucking in vast quantities of cheap parts and components from places in Southeast Asia where wages are lower than in China – Thailand, the Philippines, Indonesia, and Vietnam. So if China’s currency rises and as a result it’s more expensive to export stuff from there, where do you suppose both parts and assembly operations will move? To these lower-wage countries. Remember, we’re dealing with big global companies that are seeking the lowest costs from anywhere around the world — companies often headquartered here in the United States. Even if and when the trade deficit with China narrowed, America’s overall trade deficit with Asia could very likely grow.

The real problem isn’t our trade deficit with China. The problem is that America as a whole is living beyond its means. If anything, China has been an enabler – lending us heaps of money to continue our buying binge, including (at least until the bubble burst) homes with low-interest mortgages. That binge seems to be coming to a close. But if American politicians succeed in forcing China to raise its currency another 10or 20 percent, the binge will end faster than you can say the word “stagflation.”

But not all Americans feel they’ve been living beyond their means. For most, wages continue to stagnate, inequality is widening, and jobs are less secure. The median wage, adjusted for inflation, is below what it was in 2000. Almost all the benefits of American economic growth have gone to the very top. Don’t make China a scapegoat for this, either.