January 21, 2010

January 21, 2010 | Commentary on Deficits, Trade

China Excuse Falls Short

Politicians are falling in love with "the China excuse" -- one so poor it could be mouthed only by an American president or members of Congress.

China is said to be both chiefly at fault for our huge trade deficit and indispensable to financing our huge budget deficit. Some go further, arguing that we are declining, China is rising, and we better keep it on board -- or else.

These are the excuses of a government that can't exert even the minimal self-discipline needed to guide the American economy -- by far the world's largest -- which has the best endowment of human, natural and technological resources and the most flexible, adaptive markets.

Our top political figures cover for their failures by wildly overstating the importance of China to our trade and budget deficits. In trade, sustained deficits like ours stem ultimately from too little saving. The most direct way for the United States to cut deeply into its trade deficit, with China and everyone else, would be to save more.

American households have started doing so. Their saving rate has moved from less than 1 percent to near 5 percent in the past 18 months. But a potentially dramatic improvement in the trade deficit has been undermined by the federal government, which has gone on an unprecedented spending binge.

Last January, then-President-elect Barack Obama said "only government" could replace household spending and the new Congress was all too willing to oblige. China's role in causing our trade deficit is marginal.

The budget-deficit argument is more tortured. It starts by attributing the gigantic deficit in part to Chinese financing. How dare they make it easier for us to spend money we don't have! This is little more than a childish abdication of responsibility by at least two presidents and many more sessions of Congress.

The other claim is that the U.S. desperately needs Chinese financing so we can maintain the terrible fiscal policy we shouldn't have adopted in the first place. This claim has no foundation.

China's investment in U.S. Treasury bonds became much smaller and less important in 2009 than it was in 2008. Yet U.S. commercial interest rates have actually declined. China has little to do with our budget deficit. We are funding it ourselves.

At the recent annual meetings of the American Economic Association, a host of renowned scholars anticipated a weak decade ahead for the U.S. Their view might change dramatically if we didn't face trillion-dollar deficits or trillion-dollar tax hikes for years to come, with only vague promises of improvement from the same people who created the problem.

There is still strong domestic and foreign demand for Treasuries precisely because the fundamentals of our economy are still so strong. But it won't last in the face of all this spending.

If China could ever have been blamed for our problems, 2009 put an end to that. More than anything, it's our budget deficit that's driving our trade deficit. And it's our government's irresponsibility that is solely responsible for our budget deficit. The China excuse will no longer work -- and it will be clear who's at fault when the bill comes due.

Derek Scissors is a research fellow in the Asian Studies Center at The Heritage Foundation.

About the Author

Derek Scissors, Ph.D. Senior Research Fellow
Asian Studies Center

First appeared in Trib Total Media