Fisher Investments Perspective: The Yin and Yang of Chinese Trade

Some criticize Chinese yuan policy as a contributor to our trade deficit. But let’s review the underlying assumptions.

(This article constitutes the general views of Fisher Investments as of July 2011 and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.)

Misperceptions about global trade and currency prices abound—yet another recent example surrounds China’s artificially low-priced yuan and corresponding large trade surplus. The common argument is: China maintains an artificially low currency value versus the dollar. That makes their goods relatively cheaper than, say, goods produced in the US. (For simplicity’s sake, we’ll look at the US and China, though it applies equally to some other countries.) So US consumers’ dollars go further on Chinese goods than American because of the favorable exchange rate. The result? A trade deficit with China as the US imports more cheap Chinese goods than it exports to China.

Before assuming this is a negative to the US and a positive to China, consider the participants in those transactions: US consumers are better off because they’re getting a relative bargain—their well-valued dollars can buy more Chinese goods than US goods. And what of the Chinese? Actually, one could argue China’s somewhat negatively impacted by their low-valued currency: The cost of imported goods—including things like oil and imported agricultural goods, which have been driving Chinese inflation of late—is higher thanks to an undervalued yuan. And currency isn’t the only factor contributing to our trade deficit with China. Certain goods are produced more cheaply there because environmental or labor regulations are more lax or because of government subsidies. Trade’s never so black and white as some presume.

The other common—but incorrect—conclusion is the trade deficit the US consequently runs is somehow harmful. But Fisher Investments (and many trade economists) believe it’s the totality of trade that matters most, not trade surpluses or deficits with individual countries. Consider the countries the US has a trade surplus with: Does that mean the US is artificially keeping the dollar’s value low so we can export more to them? Or that we’re intentionally manipulating trade to maintain some sort of advantage? Probably not. More likely, those countries are interested in purchasing more goods manufactured in the US than we’re interested in purchasing from them. Nothing very sinister about that.

And those countries likely carry surpluses with other countries, who also carry surpluses and deficits with other countries. And so on—until ultimately, global trade balances, as it must.

The view that trade deficits are somehow bad is also seemingly tied to a world view insistent on pitting the proverbial us versus them. But the reality is we live in an increasingly globalized world. While one country’s trade surplus is another’s deficit, those relationships aren’t just two-way. They’re multilateral, creating a complex web uniting the globe in a magnificent process of trade, whereby everyone ultimately benefits—even if the US decreases toy production because it’s done cheaper and more efficiently in China, that frees domestic resources to shift to more efficient uses. Possibly uses ultimately contributing to our trade surplus with Brazil or Australia. And so the pattern continues, much like yin and yang.


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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.