The world, we are told, is skating on incredibly thin ice. Why?

US February Trade Deficit probably widened to $59 billion. Naturally the culprit is China:

The U.S. trade deficit probably widened in February to $59 billion, the second-largest on record, because of rising imports from China and other countries, economists said before a government report today.

The surplus reached $5.7 billion, up from $4.4 billion in February and rebounding from a $630 million deficit in March 2004.

The answer is simple. China is becoming the world's middleman. It imports resources and raw materials from commodity producer countries, it uses its cheap labour to transform those resources into products, and then it exports the finished products to Wal-Mart. China then recycles the "profits" of this process largely by buying US dollars and Government securities. Effectively, the USA is in a giant hire purchase arrangement with China (and others). It might all end in tears. But if the US continues to consume more than it produces and its consumers are rational (in the economic sense) then those consumers are estimating they will be able to repay their accumulated debts down the track. That's their choice. As long as China is prepared to continue funding their largesse the cycle continues.

Imposing tariffs or trade restrictions on China will obviously hurt China itself. But it will also hurt all of those countries that export and run large trade surpluses with China. It will hurt all of those US consumers who are enjoying cheaper clothes, video players and whatever else thanks to China's ability to transform resources into goods reliably and cheaply. America should be thanking China and celebrating the rapid benefits the cycle is bringing both to themselves and the millions of Chinese rising out of poverty.

Next time you hear about the China trade bogey-man, remember this: China isn't the problem, it's the middleman.