China and the Trade Deficit

TomPaine (good day for them) has yet another recommended post, on China, the trade deficit, and what we can do about, and why we should handle it now.

Make no mistake, trade wars are costly for all involved, and it is far better to resolve disputes by negotiation. But that said, a U.S./China trade war would have far greater costs and consequences for China than for the United States. This is of critical significance. China’s policymakers are rational and can do the math. It means they will quickly seek a negotiated settlement if confronted by a credibly exercised U.S. threat of a trade war that avoids national pride entanglements. Congressional trade legislation that sanctions China for its exchange-rate manipulation by imposing tariffs is the perfect vehicle for this. Legislation along these lines has been proposed by Sens. Schumer and Graham, and by Reps. Hunter and Ryan.

Today’s cost-benefit equation decisively favors the U.S., but that balance is shifting. The U.S. is losing manufacturing capacity, and becoming more dependent on Chinese imports. 2005 data will show that the U.S. trade deficit with China grew 25 percent. Meanwhile, China’s manufacturing capacity and sophistication are increasing. Time is therefore on China’s side