The future is local: China and the trade deficit

In case you hadn't heard, President Obama is meeting with his holiness the Dalai Lama tomorrow. This is basically unavoidable: American presidents have a tradition of meeting with the Dalai Lama going back to the George Bush the Elder in 1990. Given the nature of these two men, I'm sure he's looking forward to it. But even if he wasn't, there's really no way he could avoid it.

China will certainly condemn the meeting. This, too, is basically unavoidable. Given China's occupation of Tibet and their territorial claims on that region, they have to or else they undermine their own position.

Talking heads across the cable spectrum are already wringing their hands that this may signal renewed difficulties in the U.S./China relationship.

To be honest, I could scarcely care less about China getting their collective panties all in a twist because the President wants to meet with Tibet's spiritual leader. Really, who cares?

Here's what I care about.

• Fact: consumer spending accounts for the single largest share of the U.S. economy.


• Fact: America has an un-sustainable trade deficit because we buy more stuff from foreign nations than we sell to them.


• Fact: A ridiculous portion of that trade deficit comes from the American addiction to cheap crap manufactured in China.


• Fact: This gives China the ability to buy U.S. Treasury notes, which they do in historically large quantities


• This in turn gives the U.S. Treasury the ability to issue new debt for purposes such as helping the U.S. economy get out of recessions.

Like the one we're struggling through right now.

That's all great until China decides to start selling U.S. debt instead of buying it. Which, just the other day, it did. China signaled that it's going to be backing off on the amount of U.S. debt it holds, to the tune of three or four hundred billion dollars.

Why does this matter? Because the fact that China buys up a lot of our debt means it has leverage over our economy. China can use that leverage to help us or hurt us. Or they can do whatever the hell they want without regard to whether it helps us or hurts us.

That's pretty much what's happening, except right now it's hurting us. When the banking crisis hit back in 2008 and early 2009, suddenly the safest appearing investment in the world was U.S. Treasury notes. So China bought a lot of them. Now that things are a bit more stable and China wants cash to fuel their own economy, they're easing back on their U.S. Treasury holdings.

Fine for them, but bad for us. The net effect is that this makes it harder for the Treasury to issue new debt, which makes it harder to jump-start our struggling economy.

We have no one to blame but ourselves. We--the great American Shopper--are the ones who created this gigantic trade deficit. We're the ones who sent so many dollars, so much of our economic power, to China in exchange for cheap floor lamps, disposable consumer electronics, and plastic trinkets galore. We did that.

China will do what China will do, regardless of whether the President meets with the Dalai Lama, in response to what they feel best helps China. As it happens, we've created a situation where China helping China has the unfortunate side effect of kicking the U.S. economy while it's down.

I've said it before, and I'll say it again: the future is local.

If we ever want to have a safe, stable economy where our fates as Americans isn't impacted by what China decides to do for itself, then we have to unwind that whole series of causes and effects that have brought us to this precarious state.

We have to stop buying cheap crap from China and turn our trade deficit into a trade surplus. We have to bring manufacturing jobs back home by buying American, even if it costs a bit more. We have to stop sending the lion's share of our economic power to a country that is--however understandably--more concerned for its own fate than ours.