Pace of Growth in U.S. Trade Deficit with China Unabated in 2015

America’s trade deficit in manufactured goods with China continued to worsen in 2015 at the same pace that it has since China was granted MFN (most favorable nation) status by President Bill Clinton back in 2000.  This is in spite of the fact that wages in China have nearly quadrupled and the yuan has risen in value by 36% during that same time frame.

Here’s a chart that shows how the deficit has worsened by 367% since 2001:  China.  On average, our deficit with China has worsened at a rate of nearly 10% per year.  In 2015, it grew by yet another 6%, now reaching a staggering total of almost $388 billion.  Assuming that 2/3 of the cost to manufacture products is labor, and assuming that those jobs would pay an average of $50,000 per year, that’s a loss of 5.2 million manufacturing jobs from the U.S. economy.  It also accounts for most of the federal budget deficit in 2015, since the federal government is forced to run a budget deficit to make up the money that is drained from the economy by the trade deficit.

In fact, going back to 2001, the cumulative trade deficit in manufactured goods with China now totals $3.77 trillion.  That’s about 20% of our total national debt.

Free trade advocates would have you believe that such trade deficits are the result of a couple of factors:  low wages and/or currency manipulation – the practice of keeping a nation’s currency valued artificially low in order to make its exports cheaper and to make the exports of other nations more expensive for their own citizens.  Why do they want you to believe these things?  Because it leads one to believe that, over time, as wages rise in that country, the trade deficit will correct itself and, if we just shame that country into ending their manipulation of their currency, free trade will work as it should.  Either way, they want you to believe that free trade will work if we just give it enough time.

But the data speaks otherwise.  First of all, regarding the “low wage” argument, here’s a chart that shows how the Purchasing Power Parity (or “PPP” – analogous to wages paid) for Chinese citizens has grown since 2001 vs. the trade deficit:  China PPP vs deficit.  As you can see, the wealth of the Chinese has grown from $2,616 per person in 2001 to $14,300 in 2015.  That latter figure is now greater than the income of Americans who earn minimum wage.  In other words, the Chinese are rapidly catching up to wages in America.  But that hasn’t reversed the course of our trade deficit with China.  It hasn’t even slowed down its growth.  If there was any validity at all to a relationship between low wages and trade deficits, we should at least have seen some effect by this point.  There is none.

What about the effect of currency valuation?  Check out this chart:  China Xch rate vs deficit.  In 2005, the Chinese agreed to begin to let their currency rise in value.  By 2015, it had risen from 8.27 yuan/dollar to 6.09.  But there’s been absolutely no impact on the worsening pace of our trade deficit.  Even these two factors -rising wages and a rising Chinese currency – working together have had absolutely no impact on the pace at which our deficit with China continues to worsen!

There is no impact because neither of these factors play any role in determining the balance of trade.  Currency values don’t determine the balance of trade.  Instead, the opposite is true:  the value of China’s currency is rising because of China’s huge trade surplus.  And wages are soaring in China for the same reason.

The trade imbalance exists because of the huge disparity in population density between the U.S. and China.  China’s severe over-crowding limits their potential for personal consumption, emaciating their potential as a market place for U.S. exports.  But they are every bit as productive as American workers.  The result of attempting to trade freely under such circumstances is inescapable – an enormous trade deficit.

The only possiblity for restoring a balance of trade with a nation like China is to abandon free trade theory – a theory that doesn’t take into account the role of population density in driving trade imbalances – and adopt the use of tariffs to compensate the U.S. for China’s inability to provide access to a market that is equivalent to our own.  Nothing short of that has any chance to restore a balance of trade and avoid the U.S. being driven further toward bankruptcy.

2 Responses to Pace of Growth in U.S. Trade Deficit with China Unabated in 2015

  1. netbacker says:

    “avoid the U.S. being driven further toward bankruptcy.”
    Sorry to say, but that’s nonsense. The United States is a monetarily sovereign nation and is the sole originator of US dollars. It does not borrow it’s own US dollars from anyone.
    So it cannot run out of US dollars, hence it cannot become bankrupt financially.
    If by bankrupt you mean non-financially, meaning losing its productive capacity or its consumption capacity, that’s a different topic that needs to be explored further.

  2. Pete Murphy says:

    You are correct that, technically, the U.S. prints its own money and therefore can’t go bankrupt in the legal sense. But to suggest that that makes it immune to the consequences of debt is wrong. The U.S. issues debt obligations to fund its deficit spending, and must pay interest on that debt. Interest payments on the national debt now consume about 6% of the federal budget, and that figure grows every year.

    The federal government is saddled with a debt ceiling that can only be raised by Congress. When that ceiling is reached, the U.S. can no longer meet its debt obligations and runs the risk of defaulting on the debt, a situation that would send interest rates skyrocketing, very possibly collapsing the economy. We came perilously close to that situation a couple of years ago. Whether or not the Federal Reserve could intervene by simply printing more money and giving it to the federal government has never been tested. Would that constitute bankruptcy? If it quacks like a duck …

    Beyond the federal government, states and municipalities have no such ability to issue their own currency and are required to maintain balanced budgets. But they do issue debt to fund deficit spending. When they can’t meet the interest payments on that debt they do, literally, go bankrupt, just as the city of Detroit did a couple of years ago. In the process, Detroit’s creditors were paid pennies on the dollar, including pensioners who fared better in the courts than did bond holders, but were nonetheless driven into poverty.

    Chicago and, indeed, the whole state of Illinois faces the same situation. It’s just a matter of time. And, thanks to the loss of their tax bases to the effects of the trade deficit, virtually every state and municipality is cash-strapped and maintaining an illusion of solvency only by cutting programs, school funding, and even police and fire departments’ budgets.

    Just this week, Puerto Rico – a territory of the U.S. (not quite a “state”), defaulted on its debt and is literally bankrupt.

    The nation’s infrastructure is crumbling due to a lack of funding. Back in the ’50s and ’60s, before the U.S. ran a trade deficit, we had the resources to build the interstate highway system from scratch. Today we can’t even keep the potholes filled.

    The Flint water crisis is a perfect example of cities and states beginning to take ever more risky measures with public health and safety in an attempt to stave off bankruptcy.

    The Social Security system and Medicare are both on the brink of running out of money.

    We can’t go bankrupt? Maybe. But will it feel any different?

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