by Umar Farooq
A trade deficit occurs when an economy imports more than it exports. If this persists, it will eventually cause a shift in the exchange rate, making imports more expensive and–crucially–exports cheaper as the “invisible hand” of the price mechanism brings trade back into balance.
“American politicians have long complained of trade deficits the United States has with foreign nations. China is only the most recent case in point. But from the perspective of President Donald Trump, it is a near-perfect case in point. Last year, Americans bought around $450 billion worth of goods from China, while the Chinese bought only $100 billion worth of goods from Americans, resulting in a trade deficit of some $350 billion.” usnews
It is understandable why the White House obsession with trade deficits has popular appeal. Last year, the United States imported roughly $500 billion more goods and services than it exported, and trade with China accounted for more than 60 percent of that overall deficit. If exchange rate manipulation is not the culprit, then according to this way of thinking, it surely must come from China’s unfair trade practices.
On March 1, 2017, the Trump Administration issued its attached National Trade Policy Agenda for 2017 pursuant to 19 U.S.C. § 2213(a) (l) (B), 2017 TRUMP Trade Agenda. In the short summary, which was released on March 1st, Trump stated in part:
“The overarching purpose of our trade policy – the guiding principle behind all of our actions in this key area – will be to expand trade in a way that is freer and fairer for all Americans. Every action we take with respect to trade will be designed to increase our economic growth, promote job creation in the United States, promote reciprocity with our trading partners, strengthen our manufacturing base and our ability to defend ourselves, and expand our agricultural and other exports.
As a general matter, we believe that these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations – and by renegotiating and revising trade deals when our goals are not being met. Finally, we reject the notion that the United States can strengthen its geopolitical position by adopting trade measures that make American workers, farmers, ranchers, and businesses less competitive in global markets.”
“The U.S.-China trade imbalance is indeed driven in part by trade barriers that China enacts against American companies, including a 25 percent tariff on imported automobiles and various quotas and restrictions that reduce agricultural imports. If Mr. Trump can persuade China to loosen those restrictions, it might close the trade deficit by increasing American exports — the healthy kind of trade rebalancing. But the trade gap isn’t driven just by the details of trade arrangements. It is also driven by the flow of capital between countries. To oversimplify, when a company sells more abroad than it buys, it has to do something with that money. If the Trump administration really wants the trade deficit with China to come down over time, it’s not enough to look at only one side of the international economic ledger — flows of goods — while ignoring the flow of capital.” nytimes
In short, a trade deficit of such massive size is worrisome and actually reveals a deformed trading relationship, one in which extensive trade barriers are routinized, currency manipulation was long-standing, market logics are ignored and treaties are simply not enforced. If this huge trade deficit between U.S. and China is viewed as a symptom of a wider set of problems and a consequence of deliberate state intervention, then it is truly indeed something to worry about.
by Umar Farooq