A Chequer-Board of Nights and Days

Congressional Democrats--and not a few Republicans (Senator Graham, some of us expected better from you)--believe that Chinese exchange rate policies are responsible for the American current accounts deficit. James Dorn sets matters straight:

. . . The major reason is that US domestic private investment exceeds domestic saving, and a bloated federal government is absorbing domestic saving for redistribution rather than productive investment. Unless the savings-investment gap is closed and the US budget deficit is reduced -- by constraining the growth of government and reforming the tax code -- American and global imbalances will persist.

Congress ought to be more concerned with excessive government spending and the massive imbalances in social security and Medicare than with the US-Sino bilateral trade deficit and the dollar-yuan exchange rate. The federal budget deficit is expected to grow to more than US$500 billion in the next fiscal year, and the present value of the unfunded liabilities in social security and Medicare now amount to nearly US$43 trillion.

House Democrats have conveniently ignored these problems and chosen to use China as a scapegoat in an election year. China faces increasing inflation and, thus, has an incentive to allow faster appreciation of the yuan, without being pressured by the US and IMF. China's growth is an opportunity for American growth, as well, so Congress would accomplish more by correcting its protectionist drift than trying vainly to reduce China's influence at the IMF and manipulate exchange rates to its liking.

If a new trade strategy is needed, it should be one that recognises the wisdom of philosopher David Hume's statement in 1742: "Where an open communication is preserved among nations, it is impossible but that the domestic industry of every one must receive an increase from the improvements of the others."