April 25, 2004


The Tale of the Toaster, or How Trade Deficits Are Good (BEN STEIN, 4/25/04, NY Times)

SEE that Chinese-made toaster on the shelf at Wal-Mart that sells for $6.87, while the one made in America, on sale at your local kitchen and wine shop, costs $49.99? There is a story there, and it's not a bad story at all - or at least not an all-bad story.

Plug in the toaster, slide in an English muffin and pay attention. By the time the muffin is crisp, you will have learned something.

If you are a factory worker whose job has just been sent to Guangdong, you probably do not have kind feelings about Chinese manufacturers. If you are an automobile assembly line worker (as my grandfather was) whose factory is on shaky ground because of the torrent of Japanese imports, you may not feel madly in love with the Japanese. Few people want to lose their jobs. But if you are an ordinary American consumer or investor, you may want to connect the dots and see just what it means that the United States imports so incredibly much from China and Japan and how, in many ways, it is a substantial benefit to the American consumer and especially to the investor - at least in the short run.

As everyone knows, the United States runs very large trade deficits with many countries, but let's focus on China and Japan. The trade deficits mean that the Chinese and the Japanese collect a vast hoard of dollars by selling us toasters and other products, but that they do not spend nearly as much here buying cow hides, lumber, wheat and whatnot. They take these unspent dollars, turn them in to the central banks of their countries and get their local currencies to pay their workers and pay their mortgages.

The central banks then take all those dollars, or a lot of them, and buy Treasury securities in the United States. Japan loves Treasuries: in the last year, it has been buying those bonds at a rate of about $20 billion a month. To be sure, part of this has been to keep the dollar high and thus encourage additional American purchases of Japanese goods, but much of the reason is that Treasuries are a remarkably safe investment in terms of return of principal.

Japan now holds roughly one-sixth of all Treasury debt, or more than $600 billion of it. China has bought much less but still owns about $170 billion of the stuff and is adding a few billion dollars a month. (I am indebted to my statistician friend, Phil DeMuth, head of Conservative Wealth Management, for this data.)

This may seem scary, and, in a way, it is. It means that we citizens are paying a good chunk of our income tax each year for interest on debt owned by the Chinese and the Japanese.

But there are legions of positive effects from their bond buying and the large trade surpluses that their countries are running with the United States - and will continue to run, even if their commodities prices rise, because their labor costs will remain less.

If you're betting on the future, which is what investors do, you buy American debt.

Posted by Orrin Judd at April 25, 2004 11:26 PM

I've never understood why people think the trade deficit is bad.
"Let me get this straight----they give us cars and TVs and toasters, and we give them little pieces of paper! Just how is this a bad deal for us??!!??"

Posted by: fred at April 26, 2004 1:52 PM

They'll continue to buy - at the right price.

Posted by: Robert Duquette at April 26, 2004 2:20 PM

One of my sons-in-law likes to say we're a managerial economy. He thinks we'll manage other folks' complicated affairs for them.

Well, maybe for a few years.

It won't be too very long before the Indians figure out they don't need him as much as they do today.

And then there'll be the devil to pay, won't there?

Posted by: Harry Eagar at April 27, 2004 1:09 AM