The Still Growing US Trade Deficit with China: Whose Fault?
Photo Credit: Xinhua
By John F. Copper

The Still Growing US Trade Deficit with China: Whose Fault?

Nov. 16, 2017  |     |  0 comments

During the presidential election campaign in 2016, candidate Donald J. Trump spoke with considerable verve about the US trade deficit with China. He said that the deficit had caused the ruination of US companies, had cost American workers their jobs, and in general was very hurtful to the United States. He blamed the Chinese government for undervaluing China’s currency, among other things.

Donald Trump even threatened to formally label China a “currency manipulator” (a legal charge with serious ramifications) and place a punitive tariff on Chinese imports into the United States — as much as 45 percent. This, he suggested, would rectify the situation.

After the election, President-elect Trump’s advisors told him that China’s currency was not seriously undervalued (some even said it was overvalued to enhance China’s bid to make the Yuan an international currency and enlarge China’s global financial influence) and anyway was not a major contributor to the trade deficit. Further, they advised that imposing a large tariff might set off a trade war and was not the way to go.

In any event, Trump’s earlier charges could be written off as campaign rhetoric and part of his approach to negotiations that included provocative language and threats to keep his opponents off-guard and set the stage for talks that would embrace give-and-take and lead to tangible progress. That worked for President Trump when he was in business. It was also the modus operandi of some quite successful leaders whom Trump emulated.

Anyway, what followed was a different Donald Trump (as president) and a quite rational approach to dealing with the problem: fix the trade deficit by having the US export more to China, instead of limiting or reducing China’s exports. And to the point — pursue cordial negotiations to do that.

Implementing that strategy started with President Trump’s meeting with Chinese President Xi Jinping at Mar-a-Lago, Florida in April. President Xi understood the unsustainable trade situation and offered to import American beef and allow US financial companies to operate in China with ease. Both would have meaningful impacts on the US trade deficit.

And there was more. The two sides agreed to a 100-day period of discussing more issues to further close the trade gap. When the 100-day period ended, it was extended.

But President Xi’s “concessions” and the subsequent trade talks did not produce significant change. There was a brief positive movement in the trade figures (helped by hurricanes in the US causing a fall-off in purchases of goods). Then US exports to China increased; but so did China’s exports to the US. In fact, in August the trade imbalance set a new record.

What other factors played a role? The increase in the deficit had immediately followed the newly established US-China Comprehensive Economic Dialogue (CED) that had closed daylong meeting in July with little to announce in accomplishments. (This was not new. The Joint Commission on Commerce and Trade set up in 1983 and the US-China Strategic Economic Dialogue launched in 2006 — the CED’s predecessors — had also failed to produce results.)

President Trump had hoped to separate security issues from trade talks. Whether that was a good plan or not was undercut by the gravity of the North Korean nuclear threat. Strategic or military issues could not be isolated from economic matters, and the former prevailed.

Anyway, the promising means to raise US exports to China had some effect, but was not enough. There were also doubt about some of them working or working well.

One area is energy. China is the world’s largest importer of energy. The US has made phenomenal progress in the field and in the first five months of this year had sent 400,000 tons of US gas to China, up from zero last year. Adding to this, America exported an average of 100,000 barrels of crude oil a day to China, ten times the volume in 2016.

But the Trump administration had to deal with legal restrictions on oil and gas exports, and environmental groups opposing the fracking that had made the US energy boom possible.

Meanwhile, China opened its market to US rice exports, and Chinese companies signed deals with the state of Iowa to purchase soybeans, pork, and beef to the tune of USD 5 billion.

But this only made a small dent in the deficit — USD 367 billion in 2016.

In the realm of the best possibilities for increasing US exports — high-tech products — the impediments were even bigger. China had long made the case that lifting such barriers would do wonders to close the trade gap. A report by the Carnegie Endowment for International Peace supported this claim, noting that if the barriers against China were the same as those against Brazil the trade deficit would be cut by 24 percent, and if the same as applied to France, it would be reduced by 34 percent.

But China and the United States are the two true world powers (Europe, Russia, and Japan are relatively declining in influence) and they compete heartily for global status and power. In essence, China and America are best friends, and without a good relationship, global problems such as a stable financial system, dealing with the proliferation of weapons of mass destruction, handling global environmental problems, and much more cannot be dealt with. But the two are also rivals (some say enemies) and thus certain kinds of cooperation cannot advance further.

The recent upswing in GDP growth, rising employment and confidence in the US economy together with China’s help will contribute to fixing the US trade deficit.

Another factor is President Trump’s success in perking up the US economy with GDP growth not seen in eight years with pro-business policies such as the cutback of onerous regulations. Since 70 percent of the US economy is based on consumerism, Americans are buying more — including things from China. Hence the recent widening of the trade deficit.

Still another consideration is the fact that China’s actions to help fix the US trade deficit and America exporting more to China will take time to have a larger impact. Despite the temporary setback, further progress in fixing the US trade deficit is expected.

An increase in China’s growth rate as measured by the gross domestic product and the revaluation of the Chinese Yuan upward are also good signs. So is the fact that the US stock market has witnessed sixty-some new records while China’s stock exchange has had even bigger gains. Investors in both countries certainly do not foresee a trade war.

What happened during President Trump’s trip to China is further cause for optimism. President Xi announced purchasing a whopping one-quarter of a trillion dollars in US exports. While some of this includes earlier deals, and fulfilling the entire promise will take some time, there was, in addition, the expansion of earlier deals. Clearly this was a huge promise and will have a positive effect.

Removing tension from the negotiations, President Trump stated that he did not blame China as its leaders were simply pursuing their national interests as they were expected to do, and as most other national leaders do. Weak US negotiators were the cause, Trump said.

But so were serious impediments to America becoming more competitive and exporting more to China. They are matters not covered under the World Trade Organization rules. Also, they are problems China can do little to help America resolve. President Trump will encounter serious difficulty fixing these matters.

The American economy and thus its ability to export is handicapped by a large tax burden to pay for entitlements and other social welfare costs, and a national debt that requires high interest payments. Also, overreliance on the government for individual and family financial support translates to a lower workforce participation compared to China’s, which is among the highest in the world (and the very top ranking for women).

US wars have also been a huge drag on the economy as are continued high defense expenditures.

American labor laws and practices are another big factor in holding back American competitiveness and thus its exports. There is a recent glaring example: Tesla factories in California have not kept up with delivery promises and their quality is not good. As a result, the company is moving some of its production to China.

Crime and law enforcement, plus a huge penal system, is likewise a burden on American taxpayers and the economy. Property damage and security measures cost American businesses much more than in China. The US prison population in considerably more than their counterpart in China, even though China’s population is almost five times that of the US. Last year incarceration cost the USD 57 billion; in New York City it was USD 167,000 per inmate. China incurs only a tiny fraction of these costs.

Lawyers and lawsuits cost American businesses nearly double that of any other country. This is a serious impediment to American companies making profits and thus expanding production. China’s costs are infinitesimal in comparison.

One of the products of all of this is that R&D spending in the US is not keeping pace. Funding increases by only 2 to 3 percent a year in America, while in China it is 17 to 18 percent. Future growth and exports depend on improving products to sell and making new ones. American is disadvantaged.

The new US tax law, if and when it passes, will bring back US companies that stash money abroad to avoid high taxes in the US. The recent upswing in GDP growth, rising employment and confidence in the US economy together with China’s help will contribute to fixing the US trade deficit. Still there will remain the domestic impediments to economic expansion and exporting, as just mentioned. The trade deficit with China will thus narrow but may require a long time to be erased completely, and changes in America that are needed to do but will come hard.

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