A lot of people obsess about the trade “deficit” between China and the U.S. (Hello Lou Dobbs.) They believe that just because we buy more from China than China buys from us, we must not be doing well at international trade. That we’re not producing anything of value and they are.
You and I run trade deficits every day of our lives. I buy far more from BrouxNellie’s than BrouxNellie’s buys from me. I buy far more from Copps than Copps buys from me. I buy far more from the local BP station than it buys from me. I run a deficit with every business I walk into. So do you. There is only one business I do not run a deficit with — my employer. They purchase large chunks of my time and I purchase almost nothing from them.
These personal trade deficits are absolutely meaningless. They tell you nothing about whether or not I am producing anything of value of whether or not I’m “keeping up”. International trade deficits are just as meaningless.
Finally, the deficit as a raw number is also meaningless because it doesn’t take growth into effect. Chinese exports to the U.S. have been growing exponentially for some time. U.S. exports to China have also been growing exponentially. Both countries are importing more — and getting wealthier as a result. That’s something to celebrate, not something to bemoan.
The logarithmic vertical scale may throw some off, but the growth of imports from China to the U.S. has grown exponentially in the recorded period, rising from 293.1 billion USD in January 1985 to 25,635 billion USD (or 25.6 trillion USD!) through January 2007.
Looking at the rates at which the value of trade doubles, we find that the doubling period is fairly consistent at approximately every four years.
Here, we find that the value of what the U.S. exports to China has only fully doubled in value 3 times since January 1985, rising from 319.2 billion USD in January 1995 to 4,364 billion USD (4.3 trillion USD) in January 2007. What’s really remarkable is the acceleration of the doubling rate clearly visible over the period from January 1985 through January 2007.
Here, we find that for the first 10 years of the period, the value of U.S. exports grew at an average annualized compound growth rate of 7.2%. It took another 6 years and 3 months from November 1994 to January 2001 for the value of U.S. exports to China to double again.
And from January 2001 onward, we find that the value of all that the U.S. exports to China doubled again, in less than 3 years. That corresponds to an annualized compound growth rate greater than 24%. More significantly, since that last doubling period ended, we find that the U.S. has nearly doubled in the 36 months since, suggesting that the current rate of export growth has continued near this high level.
See — we really are both getting richer. So don’t worry about the trade deficit. And the next time you see Lou Dobbs fretting about the trade deficit, feel free to change the channel. I do.