I admire China for establishing conditions in which economic development in China benefits China.

I just wish I could admire the U.S. govenmentfor taking equally good care of U.S. citizens.

A trade deficit with any country transfers production overseas compared to what would happen with equal trade. There is no way to escape from that reality. No country should tolerate a trade deficit of the size and duration suffered by the U.S.

25% is a huge chunk. You then add in joint ventures and other situations in which the US firm doesn’t directly own the Chinese factory but gets a share of the profits. You then also add in the productivity improvement by moving production to China, and the extra wealth and employment generated from trade related activities.

ReformerRay: Firms located in China, regardless of ownership, increase the employment and skill development of the Chinese people.

They do, but that’s because the Chinese government sets up conditions to have that happen. It doesn’t automatically happen that way, and many third world countries (including China earlier this century) have had situations in which you had foreign firms that *didn’t* improve local standards of living.

This does have a social impact, because since the government undertakes policies to make sure that foreign firms end up benefiting China, there isn’t a lot of anti-foreign business sentiment.

ReformerRay: Which means that employment and skill development in the U.S. is less than it would be if trade between the U.S. and all our trading partners were balanced or equal between exports and imports.

No it doesn’t. It’s possible to have situations that improve skills and employment on both sides. You just can’t change one variable and then keep everything else fixed. Just because something is good for someone else doesn’t mean that it is bad for you, and vice-versa.

Yea, the BEA calls that affiliated firms. The lastest issue of Survey of Current Business gives more data on this issue than I need.

The simplest overall summary is that when all the payments back and forth between U.S. Affiliates and foreign affiliates located in the U.S. are added to the sum of goods and services trade balance, it reduces the the total size of U.S. defiicit on goods and services. In 2006, the deficit including all the affiliates stuff was -569 and the deficit excluding all the affiliates stuff was -752 (all in billions).

Result – a 25% improvement or decrease in the size of the U.S. trade deficit when flows from affiliates are included. This means that most of the money flows does not involve affiliates.

So, Twofish, we are still trading primarily with Chinese firms located in China. Also, money flows are only part of the problem I wish to correct. Firms located in China, regardless of ownership, increase the employment and skill development of the Chinese people. Which means that employment and skill development in the U.S. is less than it would be if trade between the U.S. and all our trading partners were balanced or equal between exports and imports.

I am all for development in China. I just do not want it to be increased because of a trade surplus with the U.S. Equal trade provides plenty of opportunities for development of employment and skill in all nations.

You are correct. I found it on the GAO web sheet. The US government indeed has a balance sheet, but it doesn’t really balance since the net liabilities far exceed assets.

Which may be and often is a US company.

ReformerRay: Foreigners still own the asset, just as they did before it was sent back to the U.S.

Except that ownership can be very decoupled from factory location. Profits from a plant in Shanghai, might end up being owned by General Motors, whereas plants in Alabama may end up being owned by Toyota.

Brad Setser amd I have a disagreement on this point, I think. I believe that whoever in the U.S. pays for what they buy from abroad finances the trade deficit. No other source of financing is needed. Imports are only paid for once.

The flow of money generated by a purchase of an item shipped from overseas is more complex than usually described.

First, say the U.S. is the locatio of the purchaser. First, dollars flow from the U.S. to the company that shipped the product. Second, those dollars can be assumed to return to the U.S. Why? Because the foreigner that now ownes these dollars prefers another form of financial asset – such as a Treasury bond or stock in a company or ownership of something else, maybe a company or a plot of land. All these financial assets are likely to provide some kind of return on the investmemnt. The important point that a certifiate of ownership is sent back overseas in payment for the dollars owned overseas that are sent to the U.S.

This return trip of the dollars does not change the net financial assets owned in either country. Foreigners still own the asset, just as they did before it was sent back to the U.S.

If people would recognize this there would be less speculation about when foreigners will become unwilling to ship goods to the U.S. They will cease sending goods here when what they can get in return (such as dollars) is no longer valuable to them.

The ability of the U.S. to pay for the trade deficit depends on the value of the dollar and on the distribution of dollars among U.S. citizens, business firms and governments.

Yes is should and likely would IF , trade were the only influence on the exchange rate.

In the U.S. in and out flows of dollars for purposes other than paying for trade swamp the dollars paying for trade. Thus, little correlation.

No. The US government has a balance sheet.

You can find out about it at the Congressional Budget Office, but nowhere else.