Chinese exports rose 28% in September from a year earlier, ahead of analyst consensus forecast. More importantly, China’s exports to the United States have increased by 31% since January 2018, when President Trump imposed tariffs on a wide range of US imports from China. On an annual basis, the US buys $635 billion worth of Chinese goods, which corresponds to a staggering 27% of the gross domestic product of American production.
That’s the kind of import dependency economists associate with third world countries that depend on former colonial powers. US exports to China in the past 12 months have been only 30% of Chinese exports to the US.
During the same period, Chinese exports to South Korea increased by 50%, to Taiwan by 60% and to Germany by 61%, but China imports almost as much from these three countries.
Demand for Chinese goods after the pandemic disruption has strained China’s manufacturing capacity, contributing to a power shortage that is now forcing austerity measures in key industries, including computer chips.
China emerged from the COVID-19 epidemic faster than any other major industrial country and suffered less disruption to its production capacity. That explains some of the surge in Chinese exports to the US, despite a 20% tariff on about half of all goods sold to America.
The poor state of US supply chains is another part of the story. Orders to U.S. manufacturers for manufacturing equipment, for example, are languishing at 1992 levels, just halfway from their 1999 peak.
The 2018 Trump corporate tax cut reduced incentives to invest, lowering capital asset depreciation to pay for a lower base corporate tax rate. In response, in 2019, for the first time since the 2008 crash, US companies spent more money buying back their own shares than on capital spending.
Another problem is the shrinking of the active labor force. The employment rate in the US (the percentage of the workforce that is employed or seeking work) has fallen sharply after the COVID-19 pandemic and has not recovered.
That explains why the Trump tariffs, continued by the Biden administration, failed to reduce US reliance on Chinese manufacturing. America had no choice but to import more Chinese goods, and consumers simply paid more for them, contributing to inflation.
The Trump and Biden administrations paid $5.8 trillion in COVID aid, equivalent to about a quarter of US GDP, and extended unemployment benefits, effectively paying large segments of the workforce to stay at home. This had the dual effect of increasing demand for goods (particularly the consumer electronics the United States imports from China) and declining supply.
Labor shortages have exacerbated a number of critical bottlenecks, notably including transportation. The American Trucking Associations estimate that the US has a shortage of 60,000 truck drivers.
Note on data:
The data used in this analysis is published by the Chinese Customs General. They were seasonally adjusted with the Census X-13 algorithm, using Eview’s econometric software. China’s data for exports to the US is higher than US data for imports from China, largely due to tariff avoidance by US importers buying Chinese goods that were first exported to a third country.
The Chinese data is more reliable than the US data, due to the practice of tariff avoidance through indirect routing of Chinese exports. As Federal Reserve economists Hunter Clark and Anna Wong explained in a June 2021 study published on the Federal Reserve Board of Governors website:
The United States’ bilateral trade deficit with China appeared to have narrowed significantly since the escalation of the US-China trade dispute in 2018, US trade data shows. The Chinese data, on the other hand, tells a very different story: the deficit, as implied by China’s bilateral surplus, nearly reached historic highs at the end of 2020.
Historically, the discrepancy between these trade balance figures had remained fairly predictable and stable. But with the onset of the trade conflict, US-reported import values from China have fallen more than China-reported export values to the United States. Two reasons are likely responsible for this phenomenon: (1) US importers report too few Chinese imports to evade US tariffs, and (2) Chinese exporters report higher exports due to changes in tax breaks in China.
In this note, we see that most of the shift in discrepancy can be explained by the first factor, with an estimated $10 billion annual loss in US tariff revenue due to underreported US imports.