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Economy

Why Is the US Trade Deficit Getting Worse?

Sep 28 , 2018
  • Ding Yifan

    Deputy Director, China Development Research Center

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After the Trump administration imposed a 25% tariff on $50 billion of China's exports, it decided to impose other 25% tariff on $200 billion of China's products. The trade war tension between the United States and China seems to be escalating. However, data released by the US Department of Commerce showed ironically that the US trade deficit with China has risen 10% in July, reaching $36.8 billion.

President Trump wanted to use the trade war to reduce the US trade deficit and force more jobs to return to the United States. However, why has the deficit worsened?

In fact, the US and Chinese economies are intertwined in the global value chain. When the US economy improves, demand increases, demand for Chinese goods grows, and the US trade deficit with China increases. Only when the US economy declines and China’s exports to the United States goes down, will the US trade deficit ease. After President Trump took office, he took some economic measures, such as tax reduction and infrastructure investment, which stimulated economic growth in the short run, which also stimulated the growth of US companies' demand for Chinese imports. If the United States really wants to narrow its deficit with China, the easiest way is to re-experience a recession.

The US-China trade war is different from the US-Japan trade war in the 1980’s. The United States cannot force China to make full concessions through the same means.

Robert Lighthizer, the US trade representative, is the initiator and the most determined advocate of the trade war against China. He was a key figure in the US-Japan trade war during those years, so he also wants to weaken China's strength through trade wars and reduce US dependence on China. He expects to shift the global value chain from China, forcing American and foreign enterprises to transfer their production from China to other countries, and have US retail enterprises import from other countries.

However, this kind of strategy is difficult to implement because it will take some time for American companies to switch from China. American companies know that even if they want to source from other countries instead of China, it will take at least a year, or even up to five years. Could these enterprises afford this? Might they not go bankrupt, because of fierce competition from other countries? Therefore, American companies are not as risk-taking as Lighthizer expects.

After the lobbying by American companies, the US Congress passed a "Miscellaneous Tariff Bill" to exempt more than 1,600 imported goods from sanctions, and most of them are Chinese products. When President Trump came to power, he said that his characteristic is uncertainty. If you are a businessman, the biggest fear you are facing is uncertainty. American companies don't know for how long the Trump administration will allow the exemption of 1,600 imported goods from the high-tariff, so in July, they increased their import volumes and hoarded some stock in case of unexpected expenses. This undoubtedly magnifies the US trade deficit with China, because some American firms have concentrated in one month the imports of goods they would normally have bought over several months or even a year.

The Trump administration will probably increase tariffs on other Chinese exports, thinking that it can exert greater pressure on the Chinese economy and force the Chinese government to make concessions. In fact, the Trump administration's practices have already caused great damage to the US economy, affecting both the normal operation of US manufacturing companies and the quality of life of American consumers. According to a study by the National Association of Chemical Distributors, nearly 28,000 chemical distributor and supplier jobs would be eliminated because of higher prices from the $200 billion tariffs. Continued tariff increases will only hurt corporate profits, force job cuts, and even destroy companies. Jonathan Gold, a spokesman for a business group formed to fight tariffs called Tariffs Hurt the Heartland, said: "Tariffs are taxes, plain and simple. By choosing to unilaterally raise taxes on Americans, the cost of running a farm, factory, or business will grow. In many cases, these costs will be passed on to American families."

If the Trump administration’s trade war continues, it will certainly cause further division of American society. Recently, the California Parliament passed a bill asking the president to improve relations with China, because California's economy is closely related with China, and it is vital for California to attract Chinese investment and trade. There are also some states that rely heavily on agricultural exports. China was an important export market for these states, but they are losing out market because of trade wars. Voters in these states are changing their political attitudes, from resolutely supporting Trump to starting to question his policies.

President Trump expected to gain more support from the people through trade wars, but the result was the opposite. If he persists in going his own way and continues to fight the trade war, he will offend more voters, thus improving the Democratic Party’s chances in the midterm elections. In that case, will the looming prospect of impeachment against President Trump become more dire?

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