Why the US China Trade Deficit Matters
The relationship between United States and China substantially affects the economies of both nations. Believing that we shouldn’t import Chinese goods as we buy products at the Dollar store is a little like believing we should eat only natural foods as we bite into a twinkie. Our economy currently counts on discounted prices from Asian manufactured goods, from computer and cell phones to dollar store tchotchkes. The trade war isn’t about whether to have a trade deficit with China, but about balance, or how much of a trade deficit is still healthy.
While US consumption of Chinese imported goods has overall been beneficial to United States citizens, the trade deficit continues to rise and may be out of alignment according to President Trump. In order to carefully align trade between China and the US, we must identify the actual problem we are trying to correct. The cause and cost of the rising trade deficit and level of its importance in our economy is in dispute.
Daniel Griswold in his 1998 congressional testimony said: “The U.S. trade deficit is the result of a net inflow of capital to the United States from the rest of the world…We have become a net importer of capital because Americans do not save enough to finance all the available investment opportunities in our economy.” Today, China has invested in so many US treasury notes that it has become the largest lender to the US Government. As of September 2018, China has invested $1.15 trillion in US treasuries. As long as US and China have a healthy trade relationship, China may avoid withdrawing its loans/investments because the US recession such actions would induce, would impact consumers of Chinese imports in US.
Kimberly Amadeo in a January 18, 2019 article on TheBalance.com wrote: “The trade deficit exists because U.S. exports to China were only $130 billion, while imports to US from China were $506 billion.” The US import leaders are Computers ($77B), cell phones ($70B), apparel and footwear ($54B). China’s largest Imports of US products are Commercial Aircraft ($16B) Soybeans ($12B) and Automobiles ($10M). Recently you may have heard about China lowering its tariff on US automobile imports by 15 percent from the previous 40 percent. Since China’s tariff reduced demand for US automobiles, one of the top three US Imports, reduction of that tariff is an important step in the trade talks.
Amadeo goes on to note the two major factors in the trade deficit: 1. There is a lower standard of living in China, which allows lower wages of workers and lower prices of products and 2. The exchange rate is partially fixed to the dollar. The question raised by this and other articles on the US China Deficit is “Would working toward a balanced trade mean a reduction in US standard of living?”
Gwynn Guilford and Corinne Purtill claimed the US purposefully runs a trade deficit to maintain the dollar’s position as the world’s dominant currency in their May 2, 2018 Quartz.com article. To cure the deficit would mean we no longer want to be the world’s reserve currency.
Why it matters
Demand for dollar denominated assets such as US treasury bonds keeps interest rates low. That funds American investments abroad in longer term, higher yielding assets. That means the US borrower money at a low cost to invest and make more money than it pays on its debts. Giving up the dollar’s global reserve status affects quality of life, and US will ultimately become a second rate power, which will cede its position of military superiority to other nations according to Guggenheim Partners’ Scott Minerd in the Quartz article.
We are back at balance. A trade deficit with China can be healthy, as long as it is in line with the needs of both nations. Both sides of the table seem extremely motivated to meet the March 1, 2019 deadline for a trade agreement.