US-China trade deficit continues to grow – but does it matter? – BRINK – Conversations and insights on global business – Community News
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US-China trade deficit continues to grow – but does it matter? – BRINK – Conversations and insights on global business

The US trade deficit with China has increased by 20% in the past 12 months, despite tariffs imposed by successive governments. Is this cause for concern?

Derek Scissors, a Chinese economics expert at the American Enterprise InstituteBRINK said its meaning is often misunderstood.

SCISSORS: There is a widespread belief that the $300 billion commodity shortfall having China means a loss of jobs in the US. But there’s just no evidence for that.

In fact, the evidence actually goes the other way.

The economy stimulates trade, not the other way around in the US

If the US economy grows rapidly, we import more, our deficit rises and we have more employment. That evidence is fairly consistent. The US economy is the driving force behind our trading results. For everyone else, even to some extent China – the world’s second largest economy – trade results are the driving force behind their economy. But with regard to the US, the causality goes the other way. One reason is the size.

But it is also due to the fact that the dollar is the reserve currency. So if we’re in short supply, we’re running out of things to print, and we’re also printing in response to higher economic activity.

EDGE: But it’s clear that these numbers are provoking a strong reaction from the political class, leading to the idea that we need to impose tariffs to make up for this shortfall. How much effect have all these tariffs had on the deficits and on the trade relationship?

SCISSORS: We haven’t had much time to assess their impact, as the first rate came in mid-2018, and it was very small and didn’t really mean anything. More tariffs were imposed over the course of 2019 – and they seemed to have an impact. But then the pandemic broke out, and that had a much bigger impact on US trade with China and US demand than tariffs.

Rates have little effect

The first half of this year compared to the first half of 2019 shows that while tariffs rose, US imports from China actually increased. People might say this is due to a previously reduced demand, it’s temporary. But it seems the rates haven’t had much of an effect.

EDGE: Business in the US is constantly asking for China to moderate its behavior and reduce its subsidies to state-owned companies and so on. Did that have much of an effect?

Instead of tariffs, the US should focus first on the separation of technology and intellectual property from China for several reasons.

SCISSORS: Not on US policy or on Chinese policy. I don’t think anyone with any experience with China under Xi Jinping believes a meaningful change is on the way. The things China wants to do without being coerced is to hinder access to its market while freely exporting to other markets – privileged state-owned companies, subsidizing Chinese companies in what they consider strategic industries, and so on. We’ve made very little progress to change that, regardless of US threats.

Businesses want the US to talk to China about making those changes, but not threaten them. I don’t believe that’s a fair approach. Businesses are willing to accept harmful Chinese measures to maintain a sizeable economic relationship between the US and China. When Xi Jinping first replaced Hu Jintao, the business community lobbied for change at the time — that was reasonable. Who knew then what Xi Jinping was going to do? But now they know very well that the Chinese will not change their policies.

China benefits from foreign exchange

EDGE: You state that the deficit has a significant impact because of the impact on foreign exchange reserves. Why does that matter?

SCISSORS: What we do with the shortfall is we give Chinese dollars in exchange for goods. But there is a benefit to the United States: we get the goods. We don’t have to buy Chinese goods, and yet we do – and they get dollars. There are other ways in which we can acquire goods. We could make them here, but that would be more expensive. We could import them from other countries, but we prefer to buy Chinese goods.

Most importantly, the dollar is the world’s reserve currency. You can use it for everything. You can use the euro for many things. You can’t use renminbi for everything because there are restrictions that the Chinese place on the use of renminbi which makes it much less attractive for people to take renminbi as payment. So the US gives China the most valuable currency, and they build it.

They have by far the largest foreign exchange reserves in the world. Anyway, they are over $4 trillion. If you look back at the relationship between the US and China, we’ve given them $4.6 trillion over the past 20 years. Without these reserves, their balance of payments is destabilized and they are forced to implement reforms, including some of the reforms we want them to make.

What we’re doing by paying for their imports is we’re allowing them not to change their system and not to make reforms that we want. We also give them foreign currency to do things like the Belt and Road Initiative abroad, which US policymakers fear will give China leverage in Belt and Road countries. We fund that – the Belt and Road exists because of us. We give the Chinese the pile of dollars that they can use to engage in their global activities, many of which we don’t like.

Focus on intellectual property instead

EDGE: What effect does this storage of foreign reserves have on the US economy?

SCISSORS: There is an indirect effect, which mainly has to do with competition from third parties. Dollars allow the Chinese to subsidize their operations abroad in dollars. Chinese companies can compete with US companies both in third markets, and if they manufacture in a third country to export to the United States, they can compete with US companies here.

There’s what economists call a second-order negative effect on US competitiveness: we help Chinese fund economic activities outside of China in dollars.

Instead of tariffs, I would focus on technology separation first for several reasons. We allow Chinese theft of US intellectual property and do nothing about it. In the public domain, the Chinese have stolen an estimated hundreds of billions of dollars of US intellectual property over time. China is becoming more competitive because they have adopted American innovation without paying for it. So the US should first start separating technology and intellectual property from China.

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