China's March Trade Deficit Causes US Pols to Apologize for Currency Demagoguery

Ok, ok.  They didn't do that, but if you believed this headline, then I've got a revenue-less trade blog to sell you.  That said, I wasn't kidding about the trade deficit - China recorded one in March 2010 for the first time in six years.  Here's the WSJ with the big news:

With imports of commodities surging last month, China swung to a trade deficit of $7.24 billion in March from a surplus of $7.61 billion in February, according to figures issued by China's Customs agency. Overall imports were up 66% from a year earlier in March, with purchases of crude oil and copper at near-record levels in volume terms. The import bill was further boosted by rising commodity prices.

Chinese officials had said weeks ago that March could well show a rare trade deficit, a development they highlighted to show how China's strong growth has been boosting its purchases from other countries. China's trade surpluses have in fact been shrinking as the government's stimulus plan boosted purchases from abroad. The cumulative trade surplus for the first quarter of 2010 was down 77% from a year earlier to $14.49 billion.

The deficit in March mainly came from China's trade with Taiwan, Japan and South Korea, Customs said, while it continued to run surpluses with the U.S. and the European Union. Those big trading partners have been among those arguing that China's practice of keeping the yuan effectively pegged to the U.S. dollar gives its exporters an unfair advantage and contribute to the large trade surpluses.

China's Ministry of Commerce, which has been a vocal defender of exporters and opponent of any change in the currency regime, argued the latest data show no move is needed.

"The continued improvement in our country's balance of trade has created the conditions for the renminbi's exchange rate to remain basically stable," spokesman Yao Jian said in a statement, using the currency's official name. He said the fact that China ran a deficit in March, without any move in its currency, shows that "the deciding factor for the balance of trade is not the exchange rate, but market supply and demand and other factors."...

Economists said March's exports were lower than they otherwise would have been as factories were slow to reopen after the weeklong Lunar New Year holiday in February. Exports still grew quickly in March, but the expansion slowed to 24.3% from a year earlier, compared to 31.4% growth in the first two months of the year....

Chinese officials showed no signs of alarm at March's deficit, the first since April 2004. "This kind of deficit is healthy as it happened while both imports and exports experienced rapid growth," Zheng Yuesheng, director of the statistics department of China's customs, said during China's state television news broadcast Saturday. China will mainly run trade surpluses over the long term, he said, though the size of the surpluses should shrink.

The domestic economy has been on the mend, and China is due to issue its first quarter gross domestic product data on Thursday. On Friday, data from the semiofficial China Association of Automobile Manufacturers showed that auto sales in the country, one indication of how domestic demand is doing, rose 56% from a year earlier to a monthly record of 1.74 million units and were up a sharper 72% for the quarter....

Two important things here.  First, the countries with which China has a large trade deficit - Taiwan, Japan and South Korea - are the same guys who produce the component parts for the iPod (or iPad) and other consumer electronics that are assembled in China and then shipped to the United States and elsewhere as finished products, thus counting as part of the bilateral trade balance between China and those destination countries.  Pretty interesting, huh?

Second, and on a similar note, the inaccuracy of modern trade deficit and surplus figures (due to the prevalence of global supply chains like those in the iPod example above) means that we just shouldn't get too carried away with China's big weekend news.  Does it argue against the RMB as a major driver of China's trade surplus?  Yes.  Does it indicate that RMB appreciation could benefit Chinese producers?  Yes.  But is it conclusive proof that China's currency policies are harmless?  No, just as the US-China trade deficit figures don't conclusively prove that China's RMB peg is destroying the American economy.

Now, I've been arguing for years that trade balances are horrible economic litmus tests for currency policies and/or trade policies, so it would be really inconsistent and insincere of me to now start screaming about China's March '10 trade deficit as conclusive proof about the RMB.  So you won't be hearing that from me.  On the other hand, many US politicians - like Chuck Schumer (D-NY), Lindsey Graham (R-SC), Debbie Stabenow (D-MI), Sam Brownback (R-KS), Sherrod Brown (D-OH), Olympia Snowe (R-ME), Evan Bayh (D-IN), Ben Cardin (D-MD), Robert Casey (D-PA), Russ Feingold (D-WI), Kirsten Gillibrand (D-NY), Carl Levin (D-MI), Jim Webb (D-VA), and Arlen Specter (D-PA) - have routinely pointed to US trade deficits and Chinese trade surpluses as concrete proof that China was perniciously manipulating its currency to the extreme detriment of the American economy.  So I'm sure that these good, honest Senators will stick to their trade balance guns hold a big press conference tomorrow pointing to China's March deficit figures as proof that the RMB situation is now totally under control.  I'm also sure that they'll immediately shelve their pending China currency legislation (S. 3134) because the "big China problem" has now been solved.  Because if these Senators don't take such actions in the face of China's new trade deficit, then they could be shown to be pandering hypocrites who were jeopardizing a $400 billion US-China trade relationship just to snag a few votes, some campaign contributions, and/or a little free publicity.  And they'd never do that, right?  Right?

(And if you believe that.......)