Posted by: bklunk | May 22, 2007

And Now Some State Level Analysis

My last post highlighted a system-level analysis of international politics. In this offering, I look at a situation where state-level factors are more important.

First, the separation of powers system in the U.S. has a marked impact on the way the U.S. approaches issues of international political economy. Congress has the constitutional authority to make trade policy, and while the legislature has delegated substantial powers in this area to the executive branch, Congress and its members often threaten coercive measures to try to affect economic relations with other countries.

BBC NEWS | Business | US urges China to speed up reform

There is increasing anxiety in the US over the growing trade deficit with China, which last year surged to a record $233bn (£118bn). These fears have prompted members US Congress to press for action against China, with critics claiming the price of the yuan is kept artificially low, giving China’s industry an unfair competitive advantage.

This generally leaves the executive branch playing “good cop” to the Congressional “bad cop.”

The other “state-level” factor at work here is the voracious consumerism of U.S. culture. As my son’s girlfriend likes to sing, we like “to shop, shop, shop.” We don’t like to delay gratification nor do we particularly like to moderate our appetites.

But many economists say that these factors have a relatively small impact on the trade imbalance. They say the deficit in US international trade is due to the fact that American consumers save very little – they buy large amounts of imported goods while consumers in China and other Asian countries save a great deal.

Quite a lot at the state-level setting the stage here.

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Responses

  1. I suppose my question then would be: What is the best way to affect change and create a smaller deficit? I think my real concern is in the potential for a major market crash between the two nations. If China is experiencing a prolonged market growth a normal business cycle would suggest that the growth would at some point slow and then even reverse to some point. With the yaun artificially low and no Americans saving, where would that leave us?
    Is the best place to start a change and shrink the deficit on the “state-level”? If yes then it would seem to require not just a policy change in congress but also a movement toward saving in America- something we are exceedingly bad at.

  2. First of all it is the case that Americans are not saving enough money, instead they are spending more than they earn on their jobs. State has option, through some banking regulations to encourage more savings and by doing that government could borrow money for deficit funding from American people.
    Second, t he state should encourage and start some campaigns that are advertising purchases of domestic goods. By buying domestic goods, U.S econmy would get small burst and it will not depend that much from foreign imports, which would lead in deacrease of import deficits.

  3. Then there is only way to level the playing field with the yuan. Tariff. If China is taking advantage of us from an economic standpoint, we need to give other trade partners and ourselves an upper hand. If China is purposely keeping the yuan low to undercut us, we need to fight back with our own regulations.
    While it is true that Americans have a saving problem, I disagree with the notion that it directly impacts our situation with China. Americans saving their earnings help only one party and this Americans, not the Chinese.

  4. I think this is a “state-level” problem, but is not caused by the state. It is caused by the current consumer culture in the US. But how do you change a cultural mindset? There are a few options for the state here in order to fight against excessive consumption of imports: A) Impose tariffs, and risk a trade war, or B) use the “bully pulpit” to encourage Americans to buy less stuff. Yet the president seems to be doing the opposite of that. I recall a speech my GW Bush broadcast a few months ago in which I caught him urging US citizens to buy more and spend more for the so-called better good of the country. Option C) might be increasing sales tax. Since Americans have taxophobia, the executive branch would probably have to bite the bullet on that one, and would see their popularity plunge. The best option might be to wait it out. If China keeps getting more wealthy the way it is now, and measures are taking to close the income gap in the inland provinces, then a strong middle class will give their children higher educations which will in turn demand higher wages and after a while there will be no more profit in Chinese goods than any other developed trading partner (ie Japan), and Chinese imports would drop, evening out the deficit.

  5. It’s interesting that the official US position isn’t that American should buy less and save more but that the Chinese people should buy more and save less.


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