It's Not a Problem When the Chinese Don't Spend Their Dollars Here
What if you found out that the Chinese are burying dollars under the Great Wall of China? What would your reaction be? Would you be upset that the Chinese weren’t spending those dollars on U. S. exports, narrowing Americans’ balance of trade deficit with China? Judging by the anti-Chinese sentiment characterizing public discussion of Chinese-U.S. economic relations these days, I suspect you would.
This was a question I always posed to my university honors students when going through the fundamentals of international economics. It was a great teaching moment, because without exception, and without prompting, the students consistently parroted media concern about the balance of trade deficit with China, and that if the Chinese were spending these dollars on U.S. goods it would reduce the U. S. trade deficit, benefiting the United States.
While it is true that the U.S. trade deficit would fall (assuming you don’t count the dollars as Chinese imports), the truth is that the Chinese burying dollars under the Great Wall would be a boon to American living standards! Hard to believe? Let’s consider a simple example.
Suppose Americans are buying Chinese travel luggage for $25 per piece, and the dollars end up under China’s Great Wall. What is going on here? Americans are getting travel luggage and the Chinese are getting pieces of paper that, as far as the United States is concerned, are easily produced at relatively low cost. In other words, Americans get travel luggage in exchange for extra turns of the printing press crank at the Bureau of Engraving and Printing. Sounds like a good deal for Americans if you ask me.
Indeed, had the Chinese used those dollars to buy say, soybeans, Americans would still have the travel luggage, but less soybeans. This necessarily means a lower living standard (less soy sauce and tofu at American Chinese restaurants) compared to the dollars going under the Great Wall. Indeed, dollars going under the Great Wall mean Americans are getting the travel luggage virtually free. What’s wrong with that?
Indeed, it’s analogous to you shopping for shoes, paying by check, after which the shoe store proprietor asks you if it would be OK with you if he hung your check in a picture frame in the store rather than presenting it to the bank for payment. This means you’d be getting the shoes for free. Again, what’s wrong with that? It means a higher living standard for you.
The overall lesson here is that when people in various countries trade with each other, exports should be viewed as the cost of doing business internationally, while its imports are the benefit. The reason dollars going under the Great Wall in exchange for travel luggage is so beneficial is that the opportunity cost of producing the dollars (a few more cranks of the printing press) is so low.
Of course, it’s always possible that the dollars could reappear as the Chinese started using them for what dollars are best suited to do: buy U.S. goods (like soybeans) or stocks and bonds. If that were to happen, it would mean Americans did not get the travel luggage almost free after all. What was almost a free lunch for Americans turns out to be not almost free after all.