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"...Take a gun-boat and 1,200 tonnes of opium, and America could close its
trade gap with China
tomorrow..."
DO
DEFICITS MATTER? Right around the time that English missionaries
produced the first Bible in Chinese, the British Empire found itself with a trickier
kind of translation problem.
Exporting the English
language to China
– and a little Protestant godliness besides – was proving much
easier than exporting British-made goods.
Imports from abroad, in
contrast, just kept on growing as the industrial revolution steamed ahead at
home, sucking in the new consumer favorites –
tobacco, sugar, coffee, calicoes, porcelain and silk.
By the early 19th century,
of course, Britain
owned the plantations of the West Indies and the factories of Bengal. So those deficits didn't even
exist, let alone matter. But "the British were spectacularly
unsuccessful in finding trade goods that the Chinese wanted or needed,"
as Jonathan Spence, professor of history at Yale, noted in his Reith Lectures
for the BBC earlier this
week.
Thus "there was the
problem of trade imbalances." And stuck for consumer items to ship back
across the oceans, London's
merchants were forced to pay in cash.
For the British, money
meant gold, just as it did until the last gasp of the Gold Standard one
hundred years later. But the Chinese wanted silver.
(They never did get round
to using gold, in fact. And while Britain recovered early from the Great
Depression by abandoning gold for credit-money in 1931, one theory holds that
China side-stepped it entirely by sticking to its silver standard...)
Translating English pounds
into Chinese yuan in the 1830s meant selling gold
for silver, and that meant dealing on Europe's
precious metals market. Paying a commission to the bullion dealers of Paris or Prussia
– as well as shipping it all back and forth – only added further
to the transaction costs of running up that yawning trade gap.
What to do? A little of the
British Empire's raw cotton found a market in China,
but it wasn't nearly enough to close the trade gap. Gold bullion continued to
flow out of London, aggravating
the "bullionist" school of economists and
policy-makers. They feared a shortage of coin in the domestic British
economy, plus a fall in the Pound Sterling's international value...as well as
giving work to foreign laborers, and paying profits
to their foreign masters...while leaving the London
exchequer impoverished should it ever need to fund a military defense of the home front.
And so "it was this
melancholy failure of the balance of trade that led to the under girding of
the opium business in China,"
explains Prof. Spence. Opium grown in India
"started to be sold to the Chinese by British traders, and later by
American traders, because the West simply could not find enough products to
attract the Chinese in a sort of barter exchange at the time."
Widespread dope-smoking and
the social breakdown it can invite rarely chimes with government policy
– not domestically, at least. Opium had long been banned by imperial
decree from Nanjing. But after
ten years of trying to fend off Britain's drug dealers
without damaging the inflows of silver, the Qin authorities finally cracked
and made a stand, seizing 20,000 chests of the drug – some 1,200 tonnes
– landed in Guangzhou.
London responded first
with a gun-boat, and then the all-out Opium War of 1839. It ended three years
later with the Treaty of Nanjing. Britain's military might
won the island of Hong Kong,
plus reduced trade tariffs, freedom from Chinese law for its ex-pats, as well
as "most-favored nation" status.
Whatever trading rights or
concessions China
would grant in future, the British
Empire would also gain as well. Opium was then
forced on the Chinese, and the trade gap closed without the need for hard
money payments.
We still don't make much
that the Chinese want to buy. The United Kingdom's trade
deficit with China
rose 8% in the year to April '08, as Chinese imports swelled by more than 10%.
But most clearly here in
the early 21st century, it's America's turn to fumble
around for a way of settling its debts with China.
Yes, the value of Chinese imports to the US
fell slightly during the first four months of this year compared with the
first third of '07.
But US exports to China
fell faster still according to the Census Bureau's latest data. So the trade
gap widened again to rack up a deficit three times the size of America's debt to Canada or Mexico, the United States'
No.1 and No.3 trading partners respectively.
Canada and Mexico just
happen to share a land border with the States. Whereas China sits on
the other side of the Pacific. As the British Empire's
gun-boat diplomacy of 1839 attests, however, distance means little when
consumers choose to buy luxury goods overseas.
The United States,
of course, ships dollars and bonds back across the Pacific, rather than
silver or Gold bullion. But are Dollar bills and Treasuries what China really
wants, anymore than it wanted 1,200 tonnes of dope in 1839...?
The People's Bank of China
just raised the required reserves ratio – the amount of cash which
private banks must keep in reserve – to a massive 17.5%. That should
drain something like $58 billion from the domestic lending markets, reckons
the RGE Monitor, as the Chinese authorities set about "treating the
symptoms of excess liquidity."
Spooked by the risk of a
further slump in the over-heated Shanghai
stock market, however, the PBoC continues to hold
its key interest rate below the rate of consumer-price inflation. That makes
cash a losing asset class in China
today, just like it is in the US
and UK,
too.
Funnily enough, the Chinese
would still rather buy and hold precious metals apparently. China's
retail investment demand for Gold rose 63% during the first quarter of 2008,
reports the GFMS consultancy, amounting to 15.1 tonnes. Gold jewelry sales grew by 9% –"one of the few
examples of demand increasing over 2007 levels"
during the global spike to $1,000 per ounce – reaching 86.6 tonnes.
China now represents
the world's second-largest gold jewelry market
after India, over-taking
the United States
in 2007. But even at a total of 420 tonnes last year, total demand for Gold
from mainland China, Hong
Kong and Taiwan
combined remains almost negligible on a per capita basis.
That's not to say it's sure
to keep rising; but with Chinese goods now accounting for 13% of America's imports each month – more than
Mexican goods and only just less than Canada's (including petroleum)
– we wouldn't be surprised to see ever more of that wealth swapped for
silver and gold bullion.
Because deficits do matter
after all, despite what Dick Cheney claimed back in 2002 as the Dollar's 40%
decline got started.
Not least, trade deficits matter
to those countries sat at the other end of the shipping route.
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
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Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
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