I’ve just finished my annual analysis of U.S. trade with virtually every country and have begun compiling the results. It’s no small task, tallying the results for hundreds of end-use codes for approximately 160 countries. But before I present those results for the world as a whole, I want to highlight the results of a few key trade partners. Our biggest deficit is with Red China, so let’s begin there first.
After improving slightly in 2016, our trade deficit in manufactured goods with Red China worsened again to a new record – a deficit of $405 billion. Here’s the chart of trade with Red China, dating back to 2001: China balance of trade. Imports from Red China totaled $505.6 billion, almost all of which – $493.4 billion – was manufactured products. These imports were offset slightly by U.S. exports to Red China totaling $130.4 billion, of which $88.2 billion was manufactured products.
Here’s a list of the top ten imports from Red China (using the Census Bureau’s 5-digit end-use code descriptions):
- Other household goods: $70.4 billion
- Computers: $45.5 billion
- Telecommunications equipment: $33.5 billion
- Computer accessories, peripherals and parts: $31.6 billion
- Toys, shooting and sporting goods, and bicycles: $26.8 billion
- Apparel and household goods – other textiles: $24.2 billion
- Furniture, household items, baskets: $20.7 billion
- Auto parts and accessories: $14.4 billion
- Household and kitchen appliances: $14.1 billion
- Electric apparatus and parts: $14.1 billion
That’s just the top ten. Imports from Red China actually comprise 141 different 5-digit end-use codes.
And here are America’s top ten exports to Red China:
- Civilian aircraft, engines, equipment, and parts: $16.3 billion
- Soybeans: $12.4 billion
- Passenger cars, new and used: $10.5 billion
- Semiconductors: $6.1 billion
- Industrial machines, other: $5.4 billion
- Crude oil: $4.4 billion
- Plastic materials: $4.0 billion
- Medicinal equipment: $3.5 billion
- Pulpwood and woodpulp: $3.4 billion
- Logs & lumber: $3.2 billion
The trade deficit in manufactured products with Red China represents a staggering loss to the manufacturing sector of our economy – a loss of approximately eight million manufacturing jobs. Why is this happening? Why is a huge nation like Red China – a nation with four times as many people as the U.S. – unable to import from the U.S. as much as we import from them?
Some say that such trade deficits are caused by low wages – that manufacturers move their plants to low wage countries. Take a look at this chart: China PPP vs deficit. This is a chart of Red China’s PPP (purchasing power parity – roughly analogous to wages) vs. the U.S. trade deficit with Red China. If there is any merit to this claim – that low wages cause trade deficits – then the trade deficit should moderate as wages in Red China rise. That’s not what we see happening. Though wages in Red China are more than six times what they were in 2001, instead of shrinking, our trade deficit with them is now almost five times worse. Clearly, the low wage theory holds no water.
Others say the trade deficit with Red China is due to currency manipulation by Red China, keeping its value low so that its people can’t afford to buy imports, forcing them to buy domestically-made goods. OK, so let’s take a look at the trade deficit vs. the value of the Chinese yuan against the U.S. dollar: China Xch rate vs deficit. The value of the yuan has weakened by 11% in the past two years, and our trade deficit got worse by 5%. But taking a longer look, since 2001 the yuan has appreciated in value vs. the dollar by 18% but, instead of the trade deficit improving in response, it’s now almost five times worse. The currency manipulation theory isn’t supported by the data.
Undoubtedly, the trade barriers that China maintains on American imports – barriers that are fully sanctioned by the World Trade Organization – have had some effect. But as we’ll see when we look at trade with the rest of the world, the effect is pretty minimal and, when plotted on a chart of trade imbalance vs. population density, China falls right along the curve.
The real reason for the huge and worsening trade deficit with Red China is the fact that their severe over-crowding has rendered them incapable of consuming goods at anywhere near the rate of Americans. It’s the inverse relationship between population density and per capita consumption that I wrote about in Five Short Blasts. While Americans, on average, live in decent-sized single family homes with yards and drive to work, the Chinese live in tiny apartments and use mass transit or bicycles to commute. There’s little room for furniture and appliances, no use for lawn and gardening equipment, no garages to park their cars and the roads are too crowded for driving them anyway.
There is no free trade path to restoring a balance of trade in these circumstances. The only remedy is the use of tariffs to incentivize manufacturers to remain in the U.S. and provide American consumers with domestically-manufactured choices.