Walter Williams likes to make the point that he has a continuous trade deficit with his grocery store. We all do, since we go to the store and buy stuff, and they don't buy a similar amount of stuff from us.
Looked at that way, Target has a trade deficit with me. They buy more stuff from me (my labor) than I buy from them.
But such worries about trade deficits ignore a couple of basic facts about the economy.
America is the richest nation on the planet. It's an economic powerhouse that has been on top of the heap for decades. The Gross Domestic Product (GDP) of America is enormous:
ten trillion dollars per year
...and it grows about 2-3 percent every year.
America creates $10,000,000,000,000 of new wealth per year. America in 2007 is $10 trillion richer than it was in 2006. It's $20 trillion richer than it was in 2005. And so on.
It's an important point. GDP isn't a measure of how much money we have; it's a measure of how much money we make. GDP isn't just ten trillion dollars moving around; it's ten trillion new dollars. America's GDP is America's "paycheck".
So our trade deficit with China is--what, $160 billion? Something like that. Who cares? Let's say $200 billion. Do the math:
It's two percent of our GDP.
And it's not two percent of our net worth; it's two percent of our paycheck.
Bear in mind that even when China has $200 billion more dollars than we have, what are they going to do with them? Sell them to someone else? Keep them in a safe? Regardless of what happens to those dollars, only one country in the world accepts them as legal tender--America--and sooner or later someone has to spend those dollars, and they can only be spent here.
But even if they just disappear into the aether, what about it? Our government costs us $2 trillion per year--about 21% of our GDP disappears into government coffers--so what's an extra $200 billion? (And actually it's more than 21% since 21% is just the federal government, but that figure is good enough for my purposes. It illustrates the point, doesn't it?)
A lot of media folks love to scaremonger about the "ballooning trade deficits". It gets people to watch news shows and buy newspapers. But the things they are saying about China now they said about Japan in the 1980s, and every single prediction turned out to be wrong.
Japan, it was said, was poised to displace America as the top economy in the world. Japan had an incredibly unstoppable economic machine, a perfect combination of business and government which America's old-fashioned capitalism just could not compete against.
...except that Japan's economy is highly socialized, and once the yen rose against the dollar, that was it: the huge profits they had been realizing from the American market turned into average profits, and their economy faltered so badly they were in a recession for decades.
Before the mid-1980s a dollar bought 400 yen. But that changed: the dollar dropped from ¥400 to ¥200 to ¥100, where it remains today. And much of the success of the Japanese economy was built on dollars buying ¥400.
Let me give a slightly fictionalized and moderately simplified example. Here we have a Nitsubida Eloquent. In Japan it sells for ¥1.5 million. But Nitsubida decides to sell Eloquents in the United States; there, cars are averaging $15,000.
At ¥400 to the dollar, that's ¥6 million. Essentially, Nitsubida is selling its cars at four times what they can sell them for in Japan. The Americans don't notice the difference because, to them, it's $15,000, which is about what they'd pay for any other kind of car. But the Nitsubida corporation is awash in cash. They make 200,000 Eloquents per year for the export market, and can sell every one of them in America for four times the sticker price in the Japanese market; and the Japanese sticker price already assures a modest per-unit profit.
Then the yen rises against the dollar. Suddenly a dollar only fetches ¥200. Then what?
Nitsubida is still doing well. While it's true that their cars now only sell for twice what they sell for in Japan, that's still wonderful: ¥3 million for a ¥1.5 million car.
Then the yen rises against the dollar again so that it hovers around ¥100 to the dollar. Now what?
Now Nitsubida's old business model is kaput; now they can only sell cars in the US for what they sticker for in Japan: a ¥1.5 million car now sells for around $15,000. Nitsubida can still make a profit on it, of course, but the huge profits of the "weak yen" days are over.
America, in the 1980s, had "huge" trade deficits with Japan. Japan, in the meantime, was spending money like a drunken sailor. There was little unemployment in Japan. Japanese companies were buying American properties left and right.
...then it happened. The Bubble burst.
Japan's economy, the "powerhouse" that would end up overtaking America's, was built on the premise that the dollar would remain much stronger than the yen approximately forever. Japan's economy collapsed because the very fact of that trade deficit changed how Japan did things. It injected a lot of money into their economy; the products that Japan sold took with them a little bit of unemployment. But all of this had the effect of strengthening their economy so much that yen became a lot more valuable, on the world market, than they had been previously.
The yen rose against the dollar; suddenly investments that had looked very good on paper stopped looking so good. People needed money, and fast, and learned that the extremely expensive Tokyo properties they had bought didn't actually fetch anything like their appraised prices. That office building you bought for ¥2 billion was only really worth ¥1.5 billion at the most, and that assumed that the economy was doing well; with the economy tanking, you'd better be ready to accept ¥1.2 billion for it, and be glad of it.
The same was true of foreign investments. You might have paid ¥20 billion for that movie studio, but all you really bought was a name, a bunch of fake buildings, and some land in America; there was nothing real you could sell, and no one was buying at those prices anyway. Your ¥20 billion was now worth ¥5 billion at most, and your "assets" column was basically taking an uncomfortably large object up its discharge pipe.
Businesses defaulted and closed. Unemployment skyrocketed. And Japan's economy fell into a slump that it is only now recovering from, fifteen or twenty years later, even though America has continued to run a trade deficit with Japan to this day. The yen remained at its high strength because Japan's wealth was not gone--it's still the second-richest economy in the world--but because Japan's economy was not producing the way it had been, and it's taken all this time for it to readjust, for it to pay off the debts incurred during the "Bubble" years.
So, what about China?
Right now, China is about where Japan was in the 1950s. "Made in Japan" used to signify that whatever had that sticker on it was cheap junk. Now we see Chinese goods with all sorts of safety problems (lead paint, poisonous additives, etc) rather than problems with overall quality. Because of the conditions which exist right now, it's fantastically cheap to make something in China, ship it to the US, and sell it at a "fair market price" which appeals to American consumers. Everyone makes a profit, and because the dollar is strong against the yuan, China's rolling in dough.
I expect the same thing will happen to China as happened to Japan: their economy will reach a point where the yuan rises against the dollar, and once the low-hanging fruit is gone, there's going to be a readjustment.
In the meantime, though, America isn't spending money it doesn't have and it's not somehow "losing" money. It may mean that we have $200 billion less available to spend on other things, but that's true of any situation where you must decide how to allocate resources. At two percent of our GDP, it's not going to break the bank.