Fair Trade Deficit

A couple of diverging articles appeared today:

US' Snow-need "significant" China forex move
Thu May 26, 2005 04:43 PM ET
WASHINGTON, May 26 (Reuters) - Treasury Secretary John Snow repeated on Thursday that China should take steps to make its yuan currency more flexible and said that any action must be dramatic enough to be meaningful.

And from Cafe Hayek, Dr. Don Boudreaux extols the virtue of a Dr. Walter Williams (also of George Mason University) article on the Trade Deficit where Dr. Williams states:

The fact that foreigners are willing to exchange massive amounts of goods in exchange for slips of paper in the forms of currency, stocks and bonds should be a source of pride. It means America, with its wealth, rule of law and the sanctity of contracts, inspires foreigners to hold large amounts of their wealth in U.S. obligations. Their willingness to do so means something else: Trade increases competition. Ultimately it's competition, many producers competing for his dollar, that truly protects the consumer. What protects producers, at the expense of consumers, are restrictions on competition. The quest to restrict competition is what lies at the heart of the trade deficit demagoguery. When's the last time you heard a consumer complaining about his buying more from a Chinese or Japanese producer than that producer buys from him?

Some thoughts on those thoughts:

1. While Dr. Bourdeaux has stated often that a trade deficit is not debt, he then thinks it is perfectly all right for the outflow of funds from the U.S. to create an opportunity for foreign investors to support the increase of the government's debt through borrowing.
• The outflow of funds is partially a result of manipulation of currencies that allow the Chinese to be more "competitive"
• The outflow of funds is partially a result of manipulation of home markets that keep out the U.S. from Japan allowing the Japanese to be more "competitive"
• The erosion of the U.S. industrial base converts high tax revenue jobs into low tax revenue jobs thus "encouraging" the U.S. government to "borrow" from our "competitors"
2. Consumers are also businessmen who own the businesses against which the Chinese and Japanese "compete". Consumers are also the skilled workers and tradesmen who produce goods against which the Chinese and Japanese "compete". Consumers are also the taxpayers who see a large portion of their remaining income taxes go to those "competitors" who are undermining their ability to make a living wage. I think I have met quite a few "consumers" who are "complaining about his buying more from a Chinese or Japanese producer than that producer buys from him."

What Secretary Snow is discussing is the manipulation by the Chinese that undermines the very concept and practice of "fair trade". What Secretary Snow is challenging is the continued policy of currency manipulation to undermine the U.S. producers in the global marketplace. But according to Drs. Boudreaux and Williams, what that means is:

Some politicians gripe about all the U.S. debt held by foreigners. Only a politician can have that kind of audacity.

No, not necessarily. But perhaps some economists really can't see the bigger picture.