See More on Facebook

Economics

US itself to blame for trade deficits

An editorial in the China Daily blames the United States for its large trade deficits.


Written by

Updated: August 27, 2018

Holding China responsible for the US’ trade deficits and unemployment, US President Donald Trump has launched what could turn into a full-blown trade war against China, by imposing high tariffs on Chinese products and strictly restricting technology transfer. But data show the US itself is responsible for its trade deficits, and cannot solve the problem without undergoing a radical economic transformation.

The US trade deficit has its roots in Washington’s expansionary monetary policy that started with the United States unilaterally canceling the direct convertibility of the US dollar to gold in 1971 (known as the “Nixon shock”). President Richard Nixon took a series of measures in 1971 that effectively rendered the Bretton woods system inoperative, and by 1973 the US replaced the Bretton Woods system de facto by a system based on freely floating flat currencies.

Consumption-reserve gap raised US deficits

Financial liberalization in the US led to the granting of excessive loans. The low bank reserve ratio and free capital accounts, along with the dollar’s access to the overseas markets, helped US financial companies to boost the flow of the dollar in the international market. Bubbles in the real estate and stock markets created by increasing quantities of money accelerated consumption and decreased reserves. And the widening consumption-reserve gap increased US trade deficits.

Worse, given the dollar’s role as an international reserve currency, the US has had to maintain a trade deficit by printing more currency notes to buy foreign products.

Thanks to abundant capital, capital-intensive industries have developed well in the US, while its labor-intensive industries have depended on cheap labor available overseas, mainly in East Asia since the 1970s, to maintain, even increase productivity. This is what has caused huge US trade deficits with East Asian countries.

To exploit cheap labor, labor-intensive companies moved from Japan to the Republic of Korea, Singapore, and Hong Kong and Taiwan after the 1960s, and from the so-called Asian tigers to the Chinese mainland and the Association of Southeast Asian Nations member states in the 1980s. The production transfer also caused a transfer of surplus from the US to new production centers.

Owing to this shift, the US trade deficit with China has increased since the 1990s, while its deficit with other East Asian economies has dropped from 83.3 percent in 1995 to 63.1 percent in 2016. The large volume of foreign direct investment, too, increased China’s trade surplus with the US.

Using wrong method to evaluate imbalance

The US has exaggerated the trade imbalance with China, though, by evaluating it using total trade volume instead of added value, which is the difference between the cost of intermediate inputs and revenue of final consumption goods.

Thanks to its deeper involvement with the global production network, the mainland has enlarged product processing, increasing imports of intermediate products from Taiwan and the ROK, and exporting final goods to other economies including the US. The domestic added value of the Chinese mainland’s processing is only a part of the total trade value, in addition to the value of intermediate products produced by other economies.

In fact, the mainland now earns a relatively low proportion of income from the global production chain. The added value of the mainland’s exports decreased from 87 percent in 1980 to 63 percent in 2009. And the proportion of added value in China-US trade declined from 81 percent in 1990 to 66 percent in 2009.

To be more specific, the trade imbalance between Washington and Beijing is largely in technology-intensive manufacturing industries, where the mainland mainly participates in the labor-intensive production transferred from the ROK and Taiwan.

The Chinese mainland’s added value surplus of labor-intensive products with the US increased from less than 45 percent in 1995 to 55 percent in 2009, while the added value of technology-intensive industries to the US dropped after China joined the World Trade Organization, to about 35 percent in 2009.

China’s trade surplus will gradually reduce

Since China’s comparative advantages in terms of labor cost have shrunk because of rising salaries in the country, the result could be a gradual reduction in the US’ trade deficit with China, leading to a new round of international production relocation. From 1998 to 2010, the annual increase in wages in China was 13.8 percent, but it has accelerated after 2012. In 2015, the average salary in the manufacturing industry was more than $9,000 a year, which was twice that in Thailand.

As a result, some processing companies have moved to other economies where the labor cost is lower, such as Vietnam, Cambodia, Bangladesh, India, Indonesia and African countries.

In more sense than one, the imbalance in US-China trade is attributable to bilateral economic complementarity. And even though the US has imposed stiff tariffs of 25 percent on Chinese products that US enterprises stopped producing at home after the 1960s, it is highly unlikely that labor-intensive companies will move back to the US. The reason: they would prefer shifting their production base to the economies where the cost of labor is lower than in the US. The irony is that in any event, US consumers, the very group of people the Trump administration wants to make happy, will suffer most as they will have to pay for the high tariffs on imports-and the US trade deficits will hardly reduce.

Therefore, if the US really wants to reduce its trade deficit with China, it should undergo economic transformation by adjusting its economic structure.

Justin Yifu Lin is honorary dean of the National School of Development, Peking University, and Wang Xin is an assistant professor at the Institute of New Structural Economics, Peking University.



Enjoyed this story? Share it.


China Daily
About the Author: China Daily covers domestic and world news through nine print editions and digital media worldwide.

Eastern Briefings

All you need to know about Asia


Our Eastern Briefings Newsletter presents curated stories from 22 Asian newspapers from South, Southeast and Northeast Asia.

Sign up and stay updated with the latest news.



By providing us with your email address, you agree to our Privacy Policy and Terms of Service.

View Today's Newsletter Here

Economics

US urged to comply with WTO ruling

The US, under Trump, has shunned several international organizations. The United States has challenged the authority of the World Trade Organization by ignoring a WTO ruling, and such a move may escalate trade tension with China, experts said on Wednesday. The WTO announced on Tuesday that the revised countervailing measures imposed by the US on imports of certain products from China were inconsistent with WTO laws. However, the US failed to comply with the WTO ruling and accused China of “using State-owned enterprises to subsidize its economy”. The WTO mechanism is what members use to settle trade disputes, and countries in most cases abide by the rulings made by the organization, said Xue Rongjiu, deputy director of the China Society for WTO Studies. “If member economies don’t follow this procedure, the rule-based global multilateral system will be damaged and thr


By China Daily
July 19, 2019

Economics

S. Korea may review military info-sharing pact with Japan

It is unclear how the ongoing trade dispute with Japan has affected the decision. A senior Blue House official said Thursday South Korea will review whether to renew a pact with Japan on sharing military information, if needed, according to a politician here. “For now, (the government) has a position to maintain it. It can be reconsidered in accordance with (relevant) situations,” Chung Eui-yong, director of Cheong Wa Dae’s national security office, was quoted by Rep. Sim Sang-jung, head of the progressive Justice Party, as saying during a closed-door meeting with politicians. Chung, during the meeting at Cheong Wa Dae, briefed the politicians on the government’s response to Japan’s tougher export restrictions against South Korea.Sim told reporters that she raised the issue of the bilateral General Security of Military Information Agreement (GSOMIA) in the meeting.


By The Korea Herald
July 19, 2019

Economics

S. Korea cuts growth outlook to 2.2%, key rate to 1.5% amid uncertainties

Japan’s export curbs had impact on drastic lowering of outlook: BOK chief. The Bank of Korea has slashed its forecast for this year’s economic growth to 2.2 percent, reflecting the negative impact of external uncertainties including Japan’s ongoing export curbs. It also carried out an earlier-than-expected base interest rate cut to 1.5 percent, embracing the monetary easing signals in the United States and other developed economies. “Considering the changes in economic conditions since the last outlook (announcement) in April, we have set the economic growth rate for this year at 2.2 percent and the consumer price inflation at 0.7 percent,


By The Korea Herald
July 19, 2019

Economics

US tourism feels trade war pinch

Chinese travel fell 5.7 percent in 2018, its first drop in 15 years.  Travelers from China are seeking alternative destinations amid the trade war with the United States, as travel industry insiders keep a close eye on the decline in the number of those visitors. China is the third-largest source of overseas travel to the US, producing 3.2 million visitors in 2017 and accounting for 8.2 percent of all overseas travel to the country, according to the US Travel Association. Travel is the top US industry export to China, generating a $29.8 billion trade surplus with the country in 2017 and accounting for 19 percent of all exports. In addition, Chinese tourists spend an average of $6,700 per trip, about 50 percent more than the average for international visitors. Chinese travel to the US fell by 5.7 percent last year to 2.9 million visitors, the first fall in 15 years, according to


By China Daily
July 18, 2019

Economics

Sino-Africa partnership holds much potential

China has increasingly looked to the continent as an integral part of its plans. Africa’s Agenda 2063, adopted by the African Union in 2013, clearly outlines Africa’s priority areas for economic growth and development, as well as the implementation plan to be achieved during the 50-year period. The framework provides a blueprint of opportunities for continued cooperation with global development partners such as China. Out of 54 African states, 53 have bilateral relations with China under the Forum on China-Africa Cooperation. China views its Africa ties as indispensable for the attainment of its Belt and Road Initiative, which was launched in 2013 as a strategic policy for global engagement. Under the auspices of the BRI, China has conscientiously made a detailed case for cooperation to facilitate a mutual development agenda between China and Africa. As of April, 37 African nations an


By China Daily
July 17, 2019

Economics

Korea says Japan’s arbitration process offer unacceptable

Seoul has taken Japan to the WTO with an official complaint. A couple of days ahead of the deadline set by Japan for South Korea to respond to its offer of a formal arbitration process over historical disputes, the office of President Moon Jae-in made clear Tuesday that it won’t accept the call. Cheong Wa Dae’s stern stance came amid Tokyo‘s threat of additional trade measures against South Korean companies. It heralds a possible deepening of the rift between the neighboring countries. “There’s no change in the government‘s position,” a senior Cheong Wa Dae official told reporters. Asked whether that means Japan’s demand is unacceptable, the official said, “Yes it is. I think that‘s clearly conclusive.” At the center of the latest Seoul-Tokyo stand-off is compensation of Koreans forced to toil at Japanese factories and mines during World War II. Korea was under Japan


By The Korea Herald
July 17, 2019