Why the Trade Deficit is Washington’s Fault and not Beijing’s

            As the US economy was struggle, it was not long ago announced that our trade deficit with China had culminated to a 6 month high of $7.3 billion. The trade balance was growing even prior to the Great Recession—unabated—with little sign of slowing down. Many from the Conservative spectrum (Michael Savage and Pat Buchannan) to Liberal spectrum (Pro-union and Liberal Democrats) have been calling for tariffs or quotas on Chinese products.

Many political pundits posit the low wage and currency manipulation theories. The low wage theory goes like this: China and other third world countries are able to undercut US workers because their workers will work for much less.The price of labor in Africa and Haiti are significantly lower than America’s; however, we do not see jobs going over there. Last time I checked Haiti is not the next Greenwich, Connecticut nor is it likely to be any time soon. A successful industrial base requires machinery, educated people to run the factories, and political stability—exactly what Africa and Haiti lack.

It is not the wage price necessarily but wage price relative to output. For example, worker A works for $1 per hour but produces $1.25 per hour profit. Meanwhile, worker B earns $15 per hour but produces $100 per hour profit. Employers are obviously going to favor B. Of course, workers with machinery and an education will able to produce much more than a worker in a 3^rd world country without. The difference is a farmer with a tractor and a farmer with a just hoes and shovels.The tractor farmer will be able to produce so much more.

Many of those who want tariffs on Chinese goods cite China’s manipulation of currency. It is true that China has manipulated its currency.  Recently, the Chinese Renminbi has appreciated 25% against the US dollar. Any drastic and quick changes in monetary system would be disastrous for their economy; therefore, China knows it must make changes incrementally and it is. The currency manipulation theory is still lacking to explain the massive trade imbalance. Devaluating one's currency causes inflation which raises prices and eats away at savings and wages--not a winning long term economic strategy if you want to defeat poverty.  Somalia could attempt to manipulate its currency, but I doubt it would become the next raising economic star.

Our trade imbalance with China cannot be fixed with currency manipulation or tariffs. Economically speaking, when tariffs are raised or quotas imposed, it pushes supply curve back. This causes prices to rise and the wealth the nation to decrease. For example, the US raises taxes on the foreign widgets as a result domestic widget makers may be shielded from the competition, but it raises prices on construction workers who buy the widgets, making them poorer and making the widget makers richer at the expense of the construction workers. Often even the widget makers are not helped. One example of imposing tariffs wielded only disappointing results.  

In 2009, Obama slapped China with a tariff on cheap tires.  In the US, tire prices rose between 10% to 20%, and the domestic production of tires did not increase.

What then is the cause for America’s high trade deficit? We have machinery, educated individuals who can run an industrial sector, and political stability. The answer is America has highest corporate taxes in the world. The average Organization for Economic Development and Co-operation Development country corporate tax is 27.6%. America’s is 35%.  Even with tax breaks for our business, the tax rate is still higher when you factor in their corporate taxes with their tax breaks. If you were an employer, what would you rather pay—27.6% or 35%? It shows. Other countries are receiving much more foreign direct investment than us. It is time we have serious discussion about a trade parity act that will at least put our business tax rates on par with the rest of the world then we'll see who has the trade deficit.