Cherokees, China and Choices

A Chrysler Jeep Cherokee SRT8 costs $189,750 in China.  This is over 3 times what it costs in the United States.  Why the difference?  China imposes import duties and taxes on the sale of the American-built SUV in their market. (Hat tip to BeeLine reader JWA for sending me this article).

We always hear all this talk about free trade but it often seems that it is a one-way street.  We provide a freeway into our market-the richest and most lucrative in the world-but we often see roadblocks are placed on our access to foreign markets.  How about free and fair trade?

In 2011, we imported $399.3 billion of goods from China.  We exported $103.9 billion to them.  A negative balance of almost $300 billion according to US Census Bureau foreign trade stats.

In 2001, we imported $102.3 billion and exported $19.2 billion for a negative balance of $83.1 billion.

Therefore, in the last decade imports and the trade imbalance with China have both grown almost 4-fold.

Why do we let China get away with it?  As of March 2012, China holds $1.2 trillion of federal debt.  It is the largest holder of our debt with the exception of the Federal Reserve which now holds $1.6 trillion of debt due to its quantatative easing (money printing) program. ( I am excluding debt held in intragovernmental funds like Social Security). You can see this massive growth in debt held by the Fed in this graph prepared by the Federal Reserve Bank of St. Louis.  In fact, as I have written before, the Federal Reserve bought 61% of all the federal debt issued last year to finance the deficit.

This is all the result of running massive federal deficits.  You need to get the money somewhere. China increased their holdings of our debt by about $900 billion over the last decade.  In effect, a lot of the money we shipped to them for the products we imported got loaned back to us.  However, they are not buying a lot of US Treasuries any more.  Of course, they are still selling us goods.  The game has changed but we are not doing anything about it.

Last year it was the Fed who printed the money and then loaned it to the federal government.

Both of the methods we have relied recently to finance our massive federal deficits are unsustainable.  We are in a precarious situation.   It is time to make choices.  Some of them will be very tough choices.

These are a few of the choices we need to make.

We need to reduce our federal deficit.  We need to reduce federal spending.  We need to reform the tax code.  We need to reform our entitlement programs.  We need to reform our public sector retirement programs. We need to rely less on moving money around on Wall Street and actually create wealth by producing something.  We need to take advantage of our natural resources by drilling for oil and gas and mining coal.   We need to reinvigorate our industrial base.  We need to make more things here and import less from China and elsewhere.   We need to export more things and insist that our trading partners play fair.

The most important choice is going to be who we send to Washington this November.  Unless that choice is correct, it appears it will be very difficult to get the other choices right.  If we don't get it right this time we might not have many choices left to us.