US ran a record trade deficit of more than $200bn with China last year.
This has given the protectionist on the capital hill a perfect motivation to wage a trade war against China. But what the politicians don’t get is the economics foundation of this trade deficit has serve America's interest on a long term.
America is a very special country when it comes to trade deficit. The reason of trade deficit is domestic saving-investment deficit. Due to the huge federal budget deficit and the collapse of household saving, America has not been able to finance its own investment needs on its own saving. So foreign saving comes to aid. It’s not exaggerating to say America’s prosperousness is fueled by not only American its own but the whole world’s determined efforts. For example, by the end of February China has gained $853.7 billion of foreign reserve partially thankful for the huge trade surplus with USA but according to analysts three-quarters of China’s reserves are in US treasuries, stocks, equities, and estates etc which are all long term investment in US. Only US can get away with this: consume the other countries' product and still keep all the money from within and beyond. South asia couldn’t do that, that’s why they ran into 1997’s financial crisis.
Why foreign capitals are so into US?
Because US dollar is the safe haven so that US can give them these green papers in exchange for the access to their resourse, engergy and financial saving.
Because US is a black hole to capital, no other country in the world has the same ability as America to absorb so much capital and trade surplus and that’s why other country’s surplus is just like America’s surplus of which a cruicial part will be invested in America’s long term project.
Because according to Risk-return trade-off, America provides the most steady and secure return for the investment thankful for the fact that US has a long term steady political and social environment which serves as a safe harbour for the capital from other less steady areas, and America has a far better economics performance in a long run compared to any other developed countries.
That’s why America can get away with trade deficit like that. No nother countries can copy this without bankruptcy.
So we all see the important issue here is not trade deficit but how America can consistently run such an efficient and profitable asset market which can consistently attract and absorb foreign capital. One day if America is not such an ultimate destination for foreign capital, that will be an end of America’s long term prosperousness and economic dorminance.
Politicians know this well. Trade war with China serves more as an election strategy than anything else and also offers a good opportunity to force China to open up its tightened-up financial market but not constrain the trade with China.
Tags: china, america, economics, trade, Politics
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