The trade deficit between the United States and China continues to grow, but does it matter? – BRINK – Conversations and information on world trade


The United States’ trade deficit with China has grown 20% over the past 12 months, despite tariffs imposed by successive administrations. Is this a cause for concern?

Derek Scissors, an expert on Chinese economics at American Institute of Business, told BRINK that its meaning is often misunderstood.

SCISSORS: There is a widespread belief that the $ 300 billion deficit in goods with China means a loss of jobs in the United States. But there is simply no proof of this.

In fact, the evidence actually goes the other way.

The economy drives trade, not the other way around in the United States

When the US economy grows rapidly, we import more, our deficit grows, and we have more jobs. This evidence is fairly consistent. The US economy is the engine of our trade results. For everyone else, even to some extent China – the world’s second largest economy – trade performance drives their economy. But as far as the United States is concerned, the causation goes the other way. One of the reasons is the size.

But it is also due to the fact that the dollar is the reserve currency. So when we run a deficit, we run a deficit of things we can print, and we print in response to higher economic activity.

EDGE: Yet it is clear that these numbers are causing a strong reaction from the political class, leading to the mentality that we need to impose tariffs to balance this deficit. What effect have all these tariffs had on deficits and on trade relations?

SCISSORS: We didn’t have a lot of time to assess their impact as the first tariff arrived in the middle of 2018, and it was very small and didn’t really mean anything. More tariffs were imposed during 2019 – and these seemed to be having an impact. But then the pandemic erupted, and it had a much deeper impact on US trade with China and US demand than tariffs did.

Tariffs have little effect

The first half of this year compared to the first half of 2019 shows that although tariffs have increased, US imports from China have actually increased. People might say it’s because of previously depressed demand, it’s temporary. But it doesn’t seem like the tariffs have had much of an effect.

EDGE: The business community in the United States is constantly asking China to moderate its behavior and reduce its subsidies to state-owned enterprises, etc. Did that turn out to have had a lot of effect?

Instead of tariffs, the United States should focus on separating technology and intellectual property from China first for a variety of reasons.

SCISSORS: Neither on American policy nor on Chinese policy. I don’t think anyone with experience with China under Xi Jinping thinks a significant change is coming. The things China wants to do without being coerced are to prevent access to its market while freely exporting to other markets – privileged state-owned enterprises, subsidizing Chinese enterprises in what they see as industries. strategic, etc. We have made very little progress in changing all of this, regardless of US threats.

Business wants the United States to talk to China about making these changes, but not threatening them. I don’t think this is an honest approach. The business community is ready to accept harmful Chinese actions in an effort to maintain important economic relations between the United States and China. When Xi Jinping first replaced Hu Jintao, the business community at the time was pushing for change – it was reasonable. Who knew then what Xi Jinping was going to do? But now they know full well that the Chinese will not change their policy.

China profits from foreign currencies

EDGE: You argue that the deficit has a big impact because of its impact on foreign exchange reserves. Why is this important?

SCISSORS: What we do with the deficit is give away Chinese dollars in exchange for goods. But there is an advantage for the United States: we get the goods. We don’t need to buy Chinese products, and yet we do – and they get dollars. There are other ways to acquire property. We could make them here, but it would be more expensive. We could import them from other countries, but we prefer to buy Chinese products.

The key point is that the dollar is the world’s reserve currency. You can use it for anything. You can use the euro for a lot of things. You cannot use the renminbi for everything because the Chinese place restrictions on the use of the renminbi, which makes it much less attractive for people to take the renminbi as payment. So the United States gives China the most valuable currency and stores it.

They have by far the largest foreign exchange reserves in the world. In any case, they exceed $ 4 trillion. If you look at the relationship between the United States and China, we’ve given them $ 4.6 trillion over the past 20 years. Without these reserves their balance of payments becomes destabilized and they are forced to make reforms, including some of the reforms that we want them to make.

What we do by paying for their imports is that we allow them not to change their system and not to make certain reforms that we want. We also give them foreign currency to do things like create the Belt and Road Initiative abroad, which US policymakers fear will give China influence in the Belt and Road countries and. the road. We fund that – the Belt and Road exist because of us. We are giving the Chinese a reserve of dollars to engage in their global activities, many of which we don’t like.

Instead, focus on intellectual property

EDGE: What effect does this storage of foreign reserves have on the US economy?

SCISSORS: There is an indirect effect, mainly related to competition from third parties. With dollars, the Chinese can subsidize their overseas activities in dollars. Chinese companies can compete with American companies, both in third markets, and if they are producing in a third country to export to the United States, they could compete with American companies here.

There’s what economists call a second-order negative effect on US competitiveness: We help fund Chinese economic activities outside of China in dollars.

Instead of tariffs, I would focus on technological separation first for various reasons. We allow Chinese theft of US intellectual property, and we do nothing about it. At least in the public domain, the Chinese have stolen hundreds of billions of dollars in American intellectual property over time. China is becoming more competitive because it has taken American innovation without paying the price. The United States should therefore start by separating technology and intellectual property from China.

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