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

Disruption seen from auto parts duty in US-China trade war

US tariffs on Chinese auto parts will probably result in higher prices and could disrupt the global automotive supply chain industry. The Trump administration has imposed a new 10 percent tariff on $200 billion worth of Chinese goods that takes effect on Sept 24. Beginning on Jan 1, the tariffs will increase to 25 percent. China retaliated with $60 billion of new tariffs on US products. The new levies target more than 100 automotive products including engines, gaskets, rubber seals, tires and transmission shafts. Tariffs are basically taxes on the consumer, and all costs increases within the supply chain will eventually be passed along to the consumer, according to Peter Nagle, senior automotive analyst at IHS Markit. “In the short-term, suppliers might absorb some of the cost of the tariff but eventually they will have to raise prices or resource product from elsewhere, which also will rai


By China Daily
September 24, 2018

Economics

India launches world’s biggest healthcare programme

Prime Minister Narendra Modi launched India’s ambitious healthcare program on Sunday. Deemed the “world’s largest government-funded healthcare programme”, the scheme will cover half a billion people through its network of hospitals and support services. Speaking at the event, the PM said that the number of beneficiaries is equivalent to the total population of the United States, Canada and Mexico or the entire European Union. “This is a major step taken to fulfil the vision of providing better healthcare facilities to the poorest of the poor and to those standing last in the queue,” the PM said. Following the launch, the PM informed the gathering that the scheme covers diseases such as cancer, heart diseases, kidney and liver problems, diabetes and over 1300 various ailments. “The treatment of the diseases can not only be done in government hospitals but also private hospitals,” said


By Cod Satrusayang
September 24, 2018

Economics

US exempts Korean steel from import tariff

The move is seen as a positive signal for the local steel industry. Steel products made by South Korea’s SL Tech has been excluded from the US’ steel tariffs, marking the first case of exemption since the US imposed a quota on Korean steel shipments this May, industry sources said Thursday. The US Commerce Department earlier this week accepted US medical device manufacturer Micro Stamping’s request for a tariff exemption on ultrafine steel tubes imported from Korean steel company SL Tech. Micro Stamping uses ultrafine steel tubes made by SL Tech to produce medical equipment. Korean steelmakers viewed the decision as a positive sign of a higher possibility of tariff exemptions, while remaining cautious over whether the same decision would be applied to steel products used for construction and household appliances.


By The Korea Herald
September 21, 2018

Economics

China hits back with tariffs on US$60b of US goods in trade war

China has hit back with reciprocal tariffs after President Trump imposed tariffs on over $200 billion of Chinese goods. China will impose tariffs on US$60 billion (S$82.3 billion) worth of US goods as retaliati


By The Straits Times
September 19, 2018

Economics

Trump targets China with more tariffs

Trump slaps tariffs on US$200b of Chinese goods in sharp escalation of trade war. United States President Donald Trump on Monday (Sept 17) defied warnings and escalated the trade con


By The Straits Times
September 18, 2018

Economics

Trade spat perils put spotlight on need for effective strategies

Chinese experts discuss global trade tensions and policy options to ensure smooth growth of economy. Short-term challenges from the escalating trade spat with the United States have reassured Chinese officials and experts of the need to support market-oriented reform and opening-up, with a particular focus on reducing debt and limiting government intervention. That was the consensus reached by participants at a high-level forum on Sunday, during which policymakers and advisers from home and abroad gathered in Beijing. They discussed global trade tensions and policy options that would ensure smooth growth of the Chinese economy. Reforms should strengthen the market’s decisive role in resource allocation, optimize State-owned enterprises and reduce or eliminate direct subsidies for some industries, said Yang Wei­min, former deputy director of the Office of the Central Leading Group on Financ


By China Daily
September 17, 2018