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

N. Korea says it sent ultimatum to S. Korea over Mount Kumgang project

Mount Kumgang is a joint economic venture. North Korea sent an ultimatum to South Korea earlier this week that it will unilaterally remove the South-built facilities from its Mount Kumgang resort unless Seoul tears them down on its own, Pyongyang’s official news agency reported Friday. The North’s tough stance suggests little room for inter-Korean negotiations that South Korea has sought in an effort to keep the long-suspended tour project that was considered one of the most tangible symbols of inter-Korean reconciliation and cooperation. North Korean leader Kim Jong-un (Yonhap) “We sent an ultimatum on Nov. 11 that i


By The Korea Herald
November 15, 2019

Economics

China, India doing ‘absolutely nothing’ to clean up

Garbage they drop in sea floats into Los Angeles: Donald Trump. US President Donald Trump at the Economic Club of New York on Tuesday, has said countries like China, India and Russia are doing “absolutely nothing” to clean up their smokestacks and industrial plants and the garbage that they drop in sea floats into Los Angeles. Trump also claimed that he considers himself to be, “in many ways, an environmentalist, believe it or not”. US president said that climate change is a “very complex issue.” “So…I’m very much into climate. But I want the cleanest air on the planet and I want to have – I have to have clean air – water,” Mr Trump said in remarks at the Economic Club of New York. Trump while addressing the audience said that the US withdrew from the “one-sided, horrible, horrible, economically unfair, ”close your businesses down within three


By The Statesman
November 14, 2019

Economics

Continued chaos on Hong Kong roads due to strikes

All schools shut on Thursday to protect students. Hong Kong on Wednesday (Nov 13) faced a third straight day of traffic chaos as protesters continued their strike,  obstructing roads and fighting pitched battles with police across the city as schools cancelled classes. The Education Bureau announced that all schools including kindergarten, primary and secondary as well as special schools will suspend lessons on Thursday (Nov 14) out of safety concerns. The Hong Kong Association of the Heads of Secondary Schools has asked the Education Bureau to suspend school on Friday as well. “In some schools situated under the impact of confrontational events, teachers and students had their lessons amidst the tear gas,


By The Straits Times
November 14, 2019

Economics

Trump again cites questionable numbers related to Korea trade deal

Trump has used the trade deal to bolster his credentials back home. US President Donald Trump again cited questionable numbers on Tuesday as he touted his administration’s renegotiated free trade agreement with South Korea. Trump told the Economic Club of New York that the revised FTA, which took effect early this year, doubled the number of American cars that can be sold in South Korea under US standards and extended American tariffs on Korean pickup trucks by another 20 years to 2041. He then took a swipe at the previous administration of Barack Obama, which negotiated the original agreement. “The deal from the previous admini


By The Korea Herald
November 13, 2019

Economics

Uncertainty persists on US – China trade deal

This despite Trump’s comments that US and China close to trade deal. US President Donald Trump said on Tuesday (Nov 12) that the United States and China are close to a trade deal, but made clear that the prospect of tariffs was still on the table, with a warning that the US would raise tariffs on China if no trade deal was reached. His speech at the Economic Club of New York was closely watched by Wall Street but offered no new details on any signing of a much-touted “Phase One” preliminary trade deal with China. China, said President Trump, was dying to make a deal with their “supply chains cracking very badly” almost two years into the trade war. “We’re the ones deciding whether or not we want t


By The Straits Times
November 13, 2019

Economics

India should have signed up for RCEP

India has decided to put a halt on its joining the largest planned free trade area. Had India not pulled out at the last minute from signing the deal during the 3rd summit of the Regional Comprehensive Economic Partnership (RCEP) in Bangkok on November 4, the RCEP would have been the largest free trade area in the world so far—comprising of 16 Asia Pacific countries that house 3.4 billion people, and constituting one-third of the global gross domestic product (GDP) and 40 percent of global trade. Ten member countries of the Association of Southeast Asian Nations (ASEAN) along with Australia, China, India, Japan, New Zealand and South Korea fo


By The Kathmandu Post
November 13, 2019