Lessons in International Trade: U.S.-China Trade Deficit

trade war

August 19, 2021

The United States’ trade war with China has been a competition that has lasted decades. The United States has been vigorously fighting against the trade titan, but the deficit has increased dramatically since the start of the pandemic. International trade significantly depends on the efficiency of a country’s production over another. China is, unfortunately for the deficit, incredibly efficient in its production. There are other factors that have also hurt U.S. exports, which U.S. businesses have blamed on President Biden.

A trade deficit means the difference in import and exports between two entities favors one over the other. In the U.S.-China example, the difference means that the U.S. loses some amount of money because it buys fewer goods from China than China buys from the U.S. If the U.S. bought (imported) $1,000,000 of televisions from China while the U.S. only sold (exported) $700,000 worth of televisions, the deficit would be $300,000. But televisions are, of course, not the only good traded between the U.S. and China, so the deficit totals billions of dollars every year.

The U.S. Census Bureau released an article showing the trend of the deficit since June 2019. In December 2019, the deficit hit its lowest point at just over $40 billion. Since then, the deficit has been steadily rising and hit its peak of $75.7 billion, a 6.7% increase from May, in June 2021.

The pandemic has only made problems worse by creating a feedback loop for the trade deficit. Because Americans continue to buy foreign goods, ports across the West Coast are flooded with imports from China. The issue is that these same ports are also used for exports. Because the United States continues to import more than its ports can handle, exports are delayed, furthering the gap (deficit) between the United States and China.

An article from Farm Bureau details how this has affected some ports on the West Coast:

“The crush of imports has been challenging for the three ports. Backlogs of anchored container ships, which could normally be counted on one hand, reached as high as 40 in February at the ports of Los Angeles and Long Beach. Anchored ship numbers have since decreased to the low 20s and high teens but still present a major bottleneck to the movement of goods.”

At this point, it seems as if China is bullying the United States with its trading leverage.

How does China have such an advantage over the U.S. in international trade? As with any economic situation in the world, there are countless factors. Some economic principles for international trade, however, play a significant role. There are three prevalent principles in the U.S.-China trade deficit:

1.)   Absolute advantage

A country has an absolute advantage over another if it can produce the same good as another while using less resources. In the case of China, the nation can produce virtually any good cheaper than another. Chinese producers can afford to produce and sell a given good for a lower price than others, in part because of the almost nonexistent labor laws.

According to Time Doctor, the average salary for a Chinese worker in factory production equates to around 5.51 USD per hour. Because wages in China are fractions of those in the United States, it is no surprise of the cheap cost of production. For example, Peru and Chile have bountiful copper mines. They can produce, and eventually sell, copper for much cheaper than a country with comparably less copper production, like Greenland. 

It would be unreasonable for Greenland to produce the same amount of copper as countries like Peru because it would require much more effort. If Greenland were to be efficient, the nation should sell goods it can produce for cheaper than other countries – such as naturally-occurring foods that do not grow elsewhere. Fortunately for the Chinese economy, cheap labor is an abundant natural resource. American businesses outsource their labor to Chinese manufacturers only to sell the goods back to U.S. consumers at lower prices, and so the deficit is widened.

2.)   Tariffs

President Biden has still not lifted the tariffs on goods entering and leaving the United States put into place under the Trump Administration. Despite pressure from members of different industries, the tariffs still stand. These tariffs raise production costs by taxing manufacturers attempting to ship goods to other nations. Because producers do not want to operate at a loss, the cost of taxes are ultimately passed onto consumers. Producers will raise prices for goods, which will then lower demand for goods produced in the U.S.

3.)   Supply and demand

The most fundamental economic rule unsurprisingly applies to the trade wars. As mentioned in the explanation of tariffs, demand will lower when the prices are higher. The consumer will then turn to another producer who can sell the good at a cheaper price. To no surprise, consumers usually turn to a Chinese producer. Every dollar spent on a Chinese producer is a dollar not spent on a producer in the United States.

Although the claim, “China keeps raising its trading advantage over the U.S.” will not please any patriot, simple economics is the only thing stopping the deficit from lowering. The titan of an economy that China possesses has only grown during the pandemic. It will also continue to grow until the United States acts.

The most obvious solution would be for the United States to produce and sell more to China than we buy. If only the United States could sell more than we buy, the deficit would dissipate. Of course, if the solution were that easy, it would be done virtually overnight. The problem is that the difference between the exports and imports is a symptom of the trade deficit disease – not the cause. The root of the trade deficit is impossible to limit to one definitive reason, but the proceeding solutions will attempt to name a couple significant ones.

There are many ways for the U.S. to lessen the deficit, but the first step should be lifting the tariffs.

At this point in the trade wars, tariffs only cause more damage to U.S. businesses, and therefore consumers. Smaller businesses suffer by raising their own prices, which reduces profit margins. Bigger businesses can take advantage of Chinese loose labor laws by producing in the nation. Lifting the tariffs would take a burden off virtually every U.S. business. Lifting tariffs would not, admittedly, necessarily incentivize the businesses, which have moved manufacturing to China, back into the U.S. The point of lifting the tariffs would be to lessen any incentives for more businesses to move their production to China in the future. The benefit of taking the burden off U.S. businesses which produce domestically would be the primary reason for lifting tariffs. Businesses that have already moved production out of the U.S. currently have no incentive to move back into the U.S., but lifting tariffs would prevent some businesses from making the choice to move production to other nations in the future.

A possible middleground for tariffs is to only apply them to American businesses that produce outside of the U.S. These tariffs would decentivize continuously outsourcing their labor because the cost of selling would be higher. The companies that do outsource would then have an incentive to bring some portion, if not all, of their production back into the United States. This tariff re-do would incentivize U.S. businesses to move production into the U.S. while incentivizing domestic manufacturers to keep producing where they are – all while lifting the burden of tariffs on smaller businesses which do not outsource its labor.

There are some potential problems with tailoring tariffs to certain companies. The biggest businesses, for the most part, are the ones outsourcing labor. These businesses also have the most lawyers and lobbyists who would create a legislative nightmare in D.C. Despite the government applying these selective tariffs to bigger businesses for the benefit of the country, the company lawyers would sue and the lobbyists would spend months going toe-to-toe with different bureaus. If the government, however, held their position on these new tariffs, businesses would feel the need to domesticize their labor again. Fickle politicians, however, are always willing to go back on the legislation they set. In theory, however, selective tariffs would help fix the trade deficit by incentivizing U.S. businesses to produce domestically.

Another possible solution is restricting the Chinese currency, yuan. The Chinese use of the yuan is inherently unfair in international trade. Instead of adjusting in value as trade increases or decreases (like the USD), China has artificially kept the value of its currency low. China also frequently sells its own currency, which increases its abundance in other nations, further lowering the value. Because the yuan is so cheap relative to the USD, China has had to purchase hundreds of billions of foreign exchange reserves. These reserves are dangerous for foreign trade because, as the USD increases in value, the yuan stays the same – all while China has billions of exchange reserves. This difference in exchange rates effectively subsidizes Chinese exports.

There are many ways to restrict a currency, but legislation with China has never been easy. The U.S. government, however, must put some sort of regulation on how China devalues its own currency. The only other option is to keep paying for China to sell goods back to the U.S. – ones that are produced by U.S. businesses in the first place.

The title “trade wars” also gives the United States too much credit. 

If there ever was a war, it was political disguised as economic. It should be obvious that a country that has more than quadrupled its population and incredibly low costs of production has a booming economy. The competition between the U.S. and China was never economical. If the U.S. truly wishes to try to catch up to the Chinese economy, it must allow its businesses to operate efficiently; and until the United States can produce more efficiently than China, the deficit will only continue to increase.

 

 

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