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.