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

Mahathir chairs economic meeting, cost of living takes centre stage

The Economic Action Council’s main aim is to spur and stimulate sustainable economic growth. Prime Minister Mahathir Mohamad chaired the first meeting of the  Economic Action Council (EAC), which had tackling the cost of living high on the agenda. The meeting on Wednesday (March 20) looked at measures to improve the living standards of the B40 group. The Economic Affairs Ministry, which acts as the secretariat to the EAC, said that three papers were presented by representatives from the ministry, as well as the Domestic Trade and Consumer Affairs Ministry. “Aside from the cost of living, the idea of social entrepreneurship as a platform to improve the livelihood of B40 households was also brought to the meeting’s attention, as well as the implementation of decisions made by the National Action Coun


By The Star
March 21, 2019

Economics

Opinion: Japan must return to being South-east Asia’s top trade partner

Singapore’s Ambassador-at-Large Tommy Koh called on Japan to return to Asean as its top investor, as it was in the 1970s and 1980s. Veteran diplomats jousted at a public forum here over the question of whether Japan is sufficiently invested in South-east Asia, amid the former’s concerns about China’s growing influence in the region. Singapore’s Ambassador-at-Large Tommy Koh called on Japan to return to Asean as its top investor, as it was in the 1970s and 1980s. “You were Asean’s number one trade partner. Now you are number four. You were also number one in foreign direct investments. Now you are not. You have lost so much ground in South-east Asia,” he said.


By The Straits Times
March 20, 2019

Economics

Foreign firms to get access to more sectors in China

Agriculture, mining, manufacturing, service sectors to be opened up, says state planner. China’s state planner has said more opening measures will be introduced in the agriculture, mining, manufacturing and service industries, letting wholly foreign-owned firms operate in more sectors. The “negative list” of industries that are off-limits to foreign investors will be further shortened, Mr Ning Jizhe, vice-chairman of the National Development and Reform Commission (NDRC), said on the sidelines of the annual parliamentary meeting yesterday. He stressed that foreign firms will be treated as equals with Chinese companies before and after they enter China. “We are working with relevant departments and local governments… to ensure that standards for market access are consistent for both foreign and local firms,” he told reporters. Fore


By The Straits Times
March 7, 2019

Economics

China to boost consumption to stimulate a slowing economy

China will boost the incomes of urban and rural residents, and domestic consumption is expected to continue to expand and to upgrade. China is taking steps to bolster consumption in a key move to stimulate a flagging economy this year. With rising spending power among its population of 1.4 billion and growing urbanisation, there is untapped potential in a huge consumer market, said the country’s state planner on Wednesday (March 06) on the sidelines of its annual parliamentary session. Consumption has been the main driver of China’s economic growth for six consecutive years, accounting for 76 per cent of its GDP growth last year. Total retail sales grew by 9 per cent last year, although the rate was slightly slower than the year before. With GDP expansion expected to slide below 6.5 per cent this year, the government is moving to shore up the economy by encouraging greater consumption,


By The Straits Times
March 7, 2019

Economics

Malaysia state fund Khazanah records pre-tax loss of $2 billion

Khazanah declared RM1.5 billion dividends to the government, up from the 2017 dividends of RM1 billion announced before last May’s general election. Malaysia’s sovereign wealth fund Khazanah Nasional announced its first pre-tax loss in a decade amounting to RM6.27 billion (S$2 billion) in its annual review presentation on Tuesday (March 5). The company pinned last year’s losses on global market challenges, with half of its impairments due to Malaysia Airlines, the national carrier it owns. Its new managing director Shahril Ridza Ridzuan said the fund had to contend with short-term losses in order to actualise long-term gains it projects to achieve within five years.


By The Straits Times
March 6, 2019

Economics

Opinion: Belt and Road Initiative by no means a debt trap

A op-ed in the China Daily refutes claims that the Belt and Road program is a debt trap for countries. Proposed by President Xi Jinping in 2013, the Belt and Road Initiative has drawn extensive attention worldwide. After five years, the concept and vision of the initiative have been put into practice, with some already yielding fruits and promoting the building of a new pattern for the coordinated development of China and the world. Perhaps that’s why many consider the initiative to be the most important public good provided by China for the world. As a new platform for international development and cooperation, the initiative facilitates China’s engagement with the rest of world while making it possible to establish a more just and reasonable world order that would highlight the importance of Chinese wisdom in building a prosperous future for humankind. Thanks to the contributions the Belt


By China Daily
March 5, 2019