U.S. Trade Deficit with China Continues on Same Trajectory

Our trade deficit with China in 2015 continued worsening on the same trajectory that it’s been on since the onset of “free” trade with China that began after Clinton granted them “most favored nation” trade status in 2000.  Our deficit in manufactured goods (other categories of goods are trivial) hit $387.6 billion in 2015.  In 2001, it was $83 billion.  It’s worsened relentlessly by about $20 billion every year since.  Take a look at the chart:  China.

Some would have you believe that such trade deficits are the result of low wages.  Sure, wages are much lower in China.  But if there’s a relationship between trade deficits and wages, then doesn’t it make sense that, if those wages rise, then the deficit should at least begin to moderate?  The fact is that, since 2001, China’s purchasing power parity, or PPP, analogous to the average wages paid there, has risen almost five-fold.  But there’s been absolutely no effect on the trajectory of our deficit.  Look at this chart:  China PPP vs deficit.

There is a relationship there, but it’s exactly the opposite of what economists would have you believe.  What you see is that the Chinese are rapidly growing wealthier as a result of their trade surplus with the U.S.  That surplus is driven by the huge disparity in population density between China and the U.S. – 380 people / square mile vs. 90 people per square mile.  Their high population density makes it impossible for the Chinese to consume at the same level as the U.S., but they are every bit as productive.  When a country comes to the trade table with a bloated, hungry labor force, but no proportional market to offer in return, the result is inevitable – a huge trade deficit for the less densely populated nation – the U.S.

Others would have you believe that our trade deficit with China would go away if only the Chinese stopped manipulating their currency, keeping it weak in order to make imports from the U.S. expensive for its consumers while making its exports cheaper for American consumers.  That seems to make sense, but the data doesn’t support it.  Look at this chart:  China Xch rate vs deficit.  The fact is that, instead of getting weaker, the Chinese yuan has actually gotten stronger vs. the dollar by 36% since 2001, rising from 8.28 yuan per dollar to 6.09.  And instead of reversing or even moderating our trade deficit with China, it’s worsened by 367%.

How can that be?  It’s because trade imbalances have absolutely nothing to do with currency valuations any more than they are caused by low wages.  They may affect profit margins somewhat for the exporting country, but no one is going to stop exporting just because currencies change in value a little bit.  The fact is that, like wages, the currency valuation is a product of the trade deficit, not the cause.  China’s currency is getting stronger because their economy is getting stronger – thanks to their trade surplus with the U.S.

There’s only one effective remedy that can restore a balance of trade with a nation that is badly overpopulated – tariffs.  What started the trade deficit with China in the first place?  Lowering tariffs in 2000 – their prize for attaining “most favored nation” status.  Isn’t it only logical to conclude that that was where we went wrong and to correct the mistake?

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