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Statistics from March surprisingly show a new trade surplus for China. Good news for China and the rest of the world too.

The surprise return to surplus from February’s $31.5 billion deficit confounded expectations that trade would remain $1.3 billion in the red, with a solid 10.4 percent year-on-year bounce in sales to the United States helping exports grow faster than expected, customs data showed on Tuesday.

Imports undershot expectations, growing 5.3 percent on the year in March – consistent with other data suggesting soggy domestic demand in the first quarter of the year – but the trade numbers overall reinforced the view of analysts that China’s trade-sensitive economy is set for a soft landing in 2012.

Like many predicted, foreign demand for Chinese goods has not been hurt very much  by the increased value of the Yuan. The new Chinese trade surplus is being attributed to better growth in the rest of the world, particularly the US.

For skeptics who believe this is not good for the rest of the world, let me try–again– to explain.

The savings that consumers enjoy from buying foreign goods allows them to either save more money or to buy more goods. The savings might turn into better investment opportunities, and more demand for goods might come from either home or abroad.

This is an essential lesson in free-trade economics.

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A new story focuses on Argentina’s restrictions on trade, forcing importers to export goods of equal value.

Complaints have been made to the World Trade Organization from the US, the E.U., Japan and 10 other countries.

Argentina’s motivation is to preserve domestic jobs, ignoring the true advantages of real free trade, which accrue to consumers through lower prices and greater demand for both domestic and foreign-made goods.

The irony in all this is that the countries making the complaints are guilty of similar tactics. The most familiar is the US demands that China increase the value of its currency, afraid that it will cost the US more jobs.

After 200 years, people–including politicians–should better understand David Ricardo’s explanation of comparative advantage, where free trade encourages countries to specialize in the production of goods and services that they produce relatively best.

Another trade issue has surfaced in the US, solar panel manfacturers asking for tariffs applied to Chinese imports.

The strange thing is, while US companies complain that Chinese companies are able to sell cheap because of government subsidies, the US companies are also receiving subsidies.

“The methodology of this is not political,” said Frank L. Lavin, a longtime Republican who has held a series of appointments in Republican administrations, including overseeing the antidumping and antisubsidy investigations office when he was the undersecretary of commerce for international trade during President George W. Bush’s second term.

But like many Republicans, Mr. Lavin was critical of the Obama administration for having provided a half-billion dollars in federal credit guarantees to Solyndra, now bankrupt, a California company with an alternative solar energy technaology.

The US government should realize–some day–that imports that are cheap, whether subsidized or not, provide a net gain in welfare to Americans. That is the foundation of free trade theory.

Uwe E. Reinhardt has published a story entitled The Debate on Free Trade Continues. As usual, the debate contrasts the economic view of free trade with the political difficulties that stem from lost jobs and income.

…there are more things in heaven and earth, economist, than are dreamt of in your philosophy.

There certainly is something to that perspective. What often makes an economist’s analysis so sharp and crisp is precisely that it tends to be simplistic and politically naïve…I acknowledge that our case for free trade should never be the end word in a conversation on the subject, but rather a springboard for more discussion.

While I agree that more discussion is never bad, to concede that free trade is sometimes best to avoid seems only an admission that we are wrong about free trade to begin with.

In a nutshell, in that branch of inquiry, economists view the world as a giant cattle farm to be managed in ways that maximize the collective weight of the cattle, totally in abstraction from the welfare of any individual animal. We call the collective weight of the cattle social welfare.

The cattle-farm model then allows us to say, with a straight face, that if a public policy bestows a gain of $2,000 on George but makes Martha $1,000 poorer, social welfare has been increased.

This dictum underlies the economist’s case for free trade. The cattle farm is global. Free-trade analysis pays little attention to the love people have for their own nation, which makes them assign more weight to the welfare of fellow citizens than to that of citizens of other countries.

In fact, free-trade economics shows that both domestic and foreign citizens gain from free trade. What has always made it difficult politically is that we can never be sure what domestic citizens benefit. For example, sacrificing jobs making tires in the US–that brings more jobs to Asia, but it also brings more spending power to Americans–spending that will create new jobs in the US in some industry where we have an advantage over foreign abilities.

But along with my Princeton colleague Alan S. Blinder, I do worry about what the dynamic impact of completely free trade would do to America, especially when some enterprises exhibit strong economies of scale and require longer-term investments, and other nations snub their noses are the rules of free trade.

This is only another concession to politics. If other countries ignore the rewards of truly free trade, of course the US must resist, but never to the level of rejecting free trade as a worthy goal. We already have the World Trade Organization in place to regulate those disputes.

I am actually disappointed that some of my economics colleagues accept concession on the point of free trade. Politics aside, the gains of free trade have made much of the world much better off over the last 50 years, and it can continue if we can manage to stick with good analysis on the topic.

Another story about an impending trade war between China and the US.

The U.S. Congress is considering legislation that would treat what lawmakers call China’s undervalued yuan currency as an export subsidy, a step that would give the U.S. Commerce Department increased ability to slap duties on Chinese goods.

The U.S. House of Representatives is expected to pass the bill this week, but its future in the Senate is uncertain.

“If we take this additional step, it’s going to continue this downward spiral,” Tim Stratford, a former U.S. trade official who was part of a delegation visiting Washington from the American Chamber of Commerce in Shanghai, told reporters.

This time at least there is a balanced look at the story, maybe even leaning toward criticism of the legislation. One story told there is about how China retaliated when Obama placed tariffs on Chinese tires last year. China placed tariffs on American chicken parts and a few US firms lost loads of money.

My mind always turns to the benefits of importing lower priced goods. Not only does that allow people to save or to buy more, it increases demand for all kinds of other goods and services. That can mean more jobs in other industries, more profits, and a better standard of living.

China is accused of attracting more customers by keeping the value of their currency artificially low. We should be thanking them for that.

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I first saw this story in China Daily, and my reaction was to feel very pessimistic about a global economic recovery. China is planning an import tariff on American chicken products.

An initial investigation showed that the U.S. provides subsidized soybeans and corn to its poultry industry, hurting Chinese producers, the Ministry of Commerce said on its Web site today. Importers must pay the new tariff on top of anti- dumping duties of as much as 105.4 percent imposed in February. Corn and soybeans are used in chicken feed.

Though China has found a reasonable justification for the tariff–the WTO may approve the tariff because of the US subsidies–the real reason is clearly retaliation for new tariffs the US has placed on Chinese made steel pipe and tires.

President Barack Obama in September placed tariffs on automobile tires from China after labor union complaints that imports were pushing U.S. factory workers out of jobs. In February, China, the largest market for U.S. chicken, said it would impose anti-dumping duties on imports of poultry products.

The danger is that the US will also retaliate and this will turn into an all out trade war. Analysts do not yet believe that the chicken tariff will trigger retaliation, but it is clear that the political situation is getting more contentious. Though the real costs are felt by consumers and workers in both countries, the prevailing view is that business needs to be protected from unfair trade practices.

If both countries stay on the retaliation path, neither one willing to veer away, it could turn ugly enough to escalate and discourage increased production in both countries, and that could discourage recovery worldwide.

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Two articles caught my eye this morning, one on plans for the Federal Reserve to tighten money growth as recovery allows, another on the growth of the US trade deficit.

I was surprised that the trade deficit had grown lately, thinking that lower exchange rates had already boosted US exports. In fact, that has happened, but the growth in oil imports has overwhelmed the export growth in heavy machinery and commercial airplanes. It is predicted that deficits may continue to grow as American incomes grow and import demand increases.

But how will the Fed’s plans affect that?

Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.

Initial response is that borrowing will decrease and import demand–for better or worse–will probably decrease as well. But what happens to the interest income? Just a thought, but if the interest elasticity is inelastic (< 1), the actual quantity of debt will increase with higher rates.

The point of the rate hike is said to be controlling inflation, but what if the rate hike brings more money into circulation?

There is likely a mistake in my thinking here. Please point out my mistakes.

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More upsetting news about trade battles between China and the US. Last time it was tires, now it is steel pipe. The International Trade Commission gave approval for an import tariff of 10 to 16% on Chinese steel pipe.

Maybe not that much to be afraid of. The International Trade Commission is not international at all, but an independent federal agency that only gives advice to congress and the white house. They themselves have no legislative power, so the news is not that bad, though the commerce department has approved the tariff.

The United Steelworkers union, which was the driving force behind the tires case, joined with the Maverick Tube Corporation, the United States Steel Corporation and other American manufacturers in asking for import duties on Chinese-made pipe.

No surprise of course that American steel and pipe manufacturers are pushing for the tariffs. What I don’t understand is where are the American oil companies? The oil companies and their customers will be the ones paying the higher prices that result from the tariff.

The real fear is that the US is going to go even further with protectionist policy, and many countries will follow in retaliation. Like during the Great Depression, protectionism gets politically easier during hard times, and you can not get any more counterproductive.

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A Chinese think tank has come out with an essay that argues against pressure to increase the trading value of the Yuan. The general argument–a bit self serving–is that an increase in the exchange rate will hurt China’s growth and hinder the recovery of the global economy.

The essay also asserted that lifting the value of the yuan would not help narrow China’s trade surplus with the United States, as the Obama administration has claimed it would.

China’s cheap goods have helped foreign consumers facing hard times, and raising the value of the yuan could hinder global economic recovery, said the think-tank.

The last argument is the one that makes sense to me. Paying less for imported goods–especially when demand is inelastic–means consumers will have extra income left over for the purchase of other goods. Yes, that would help foster global recovery.

chinaascendingThe NY Times reports that Asia’s Recovery Highlight’s China’s Ascendance. This is something I predicted when US and China’s stimulus packages were introduced, and the statistics are coming out now. Though the US economy is still three times the size of China’s, it is China and the rest of Asia that is leading the world out of the global recession.

One question mark remains about China’s recovery, and that is whether Chinese consumers can make-up for the lost demand in exports to the US and Europe. One positive sign,  Chinese banks lent a record 1.1 trillion dollars in the first half of 2009. Another positive sign, US and European companies still find China a more affordable production location, and worker training has improved. As long as trade barriers do not become too popular, I think China will continue to lead the world out of recession.

Do you agree?

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