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Thanks to Federal Megaspending, the Trade Deficit Has Only Gotten Worse | Mises Wire

Posted by M. C. on June 17, 2021

President Trump’s protectionist trade measures against China and other external partners have not caused a reduction of the total US trade deficit. The latter actually grew further as China’s exports found indirect ways into the US and massive domestic growth stimuli were deployed during the pandemic.

https://mises.org/wire/thanks-federal-megaspending-trade-deficit-has-only-gotten-worse

Mihai Macovei

President Trump’s protectionist trade measures against China and other external partners have not caused a reduction of the total US trade deficit. The latter actually grew further as China’s exports found indirect ways into the US and massive domestic spending schemes were expanded during the pandemic.

Almost three years after the Trump administration unleashed the trade war on China, hostilities have not ended, but only entered a truce with the Phase One trade deal signed in January 2020. The US tariff hike on more than $360 billion of Chinese goods has remained in place until today. Washington imposed four rounds of tariffs in 2018 and 2019, with the bulk of the tariffs ranging from 10 to 25 percent coming into force in September 2018 and September 2019. Beijing has gradually retaliated with tariffs ranging from 5 to 25 percent on about $110 billion of US products. The difference in the volumes of products targeted by tariffs reflects the unbalanced bilateral trade.

The covid-19 pandemic took the trade war off the headlines, but its economic disruptions prevented China from meeting the condition of the Phase One deal to purchase an additional $200 billion of US products over the 2017 level. Recently China has approached the Biden administration trying to restart trade discussions, but it seems unlikely that Biden’s policy on China would deviate significantly from his predecessor’s. As a matter of fact, Biden’s trade agenda still underlines that “China’s coercive and unfair trade practices harm American workers, threaten our technological edge, weaken our supply chain resiliency, and undermine our national interests.” In addition, the tech war continues, as top Chinese tech companies suspected to be affiliated with the military remain blacklisted and recently the US Senate passed a bill providing $250 billion in subsides to high-tech sectors competing with China. But Trump’s protectionist agenda does not seem to have reached its target, so why continue it?

The US Trade Deficit Continued Growing

The sharp increase in US tariffs on Chinese goods led to a significant decline in the bilateral trade deficit of about 25 percent, or $108 billion, from 2018 to 2020. Despite the retrenchment of the deficit with China, the US trade deficit in goods with the world has actually increased by around $35 billion from 2018 to 2020, to a record-high $915 billion (graph 1). If Trump’s protectionist measures1 appear to have worked with China, they have certainly not reduced the overall trade deficit. The situation worsened in the first quarter of 2021, when the trade deficit widened by almost 50 percent with China and by more than one-third with the world during the same period in 2020 (US Census Bureau). At the same time, the surplus in the balance of services has shrunk by about 20 percent and it seems that the US is heading for a record-high current account deficit in 2021.

Graph 1: US Trade Deficit with China and the World, 2002–20

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Source: US Census Bureau

Chinese Exports Found an Indirect Way to the US

While the US trade deficit with China was shrinking, its deficit with other Asian economies was expanding almost in lockstep. From 2018 to 2020, the US trade deficit in goods to China declined by around $108 billion, but expanded by about $90 billion with Vietnam, Taiwan, Hong Kong, Singapore, Korea, Malaysia, and Thailand. Many analysts interpreted this evolution as a readjustment of global value chains and offshoring of production from China to Vietnam, Taiwan, and other Asian peers. Yet the data points to something else. As US imports from other Asian countries grew by about $32 billion in 2019 and another $30 billion in 2020, China’s exports to the same Asian economies2 grew almost in lockstep (graph 2).

Graph 2: US Imports from and Chinese Exports to Asian Economies, 2018–20

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Source: US Census Bureau and UN Comtrade Database

This would suggest that China’s production has not been relocated to other Asian economies because of the US tariff hike, but that somehow its exports have found an indirect way into the US. During the trade war, businesses were obviously eager to find loopholes to avoid exorbitant tariffs without having to shift production, in particular by using transshipment, in which Chinese exports are minimally processed during a brief stop at a third port and then reexported as a non-Chinese product. The US authorities have recognized and tried to reduce this practice, but apparently without much success. Several arguments would support this view: (i) despite a drop in Chinese exports to the US of $87 billion in 2019 and another $16 billion in 2020, China’s total exports to the world grew by $13 billion in 2019 and another $92 billion in 2020; (ii) the structure of China’s exports in terms of main products has remained broadly unchanged from 2018 to 2019, not displaying large disruptions following the trade war (according to the Observatory of Economic Complexity [OEC]); and (iii) the reorientation of US imports from China to other Asian economies took place very quickly, in a matter of months rather than years, when it would be almost impossible to shift production facilities so quickly from one country to another. It would also be naïve to think that much smaller Asian economies such as Vietnam could replace China as the world’s manufacturing hub overnight. China still enjoys a large comparative advantage in terms of workforce size and qualification, infrastructure, business environment, and internal market capacity.

If some production offshoring from China to low-cost Asian economies took place, it was mainly for low-tech and low-value goods, and has not affected China’s production and exports much. Manufacturing output continued growing by almost 6 percent in 2019 and 4 percent in 2020, while high-tech manufacturing advanced even faster, by 9 percent in 2019 and more than 7 percent in 2020. And although China’s trade surplus with the US shrunk by $108 billion, its surplus with all its trade partners actually increased by more than $180 billion from 2018 to 2020 (graph 3). This trend strengthened further during the first four months of 2021, when China’s exports grew on average by 40 percent from a year before and the trade surplus increased almost three times, to $160 billion. The negative economic impact of strict lockdowns and massive growth stimuli in the US and other advanced economies has undoubtedly contributed to China’s brisk export recovery since the summer of 2020. This also brings us to the heart of the problem of the US’s large and persistent current account deficits.

Graph 3: Chinese Trade Surplus with the US and the World, 2000–20

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Contact Mihai Macovei

Dr. Mihai Macovei (macmih_mf@yahoo.com) is an associated researcher at the Ludwig von Mises Institute Romania and works for an international organization in Brussels, Belgium.

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