A creative proposal to balance China US trade
Regardless what we think of Trump’s tariff war, the trade imbalance between China and the US is indeed substantial and unsustainable in the long term.
In typical Trump fashion, when he talks about trade, he chooses to cherry pick and talk only about the merchandise trade where the US runs a trillion dollar trade deficit with nearly all major economies.
He conveniently neglects to mention the equally massive service trade SURPLUS the US runs with the rest of the world, including China. This includes digital trade, intellectual property rights, financial services, business services, media and entertainment, tourism, education, and more.
Of course, it is easier to paint the US as a “victim” of global trade if the focus is solely on merchandise trade. The case against global trade gets diluted, even entirely negated, when one looks at the full spectrum of trade and how the US benefits disproportionately from the service trade and runs the world’s largest service trade surplus. But fairness is never the goal here.
The intellectual dishonesty is not limited to the skewered view of trade but also extends to the avoidance of a deeper discussion of the structural reason behind US merchandise trade deficit.
As is well known, the US has been deindustrializing since 1950s as its manufacturing job peaked in late 40s (37% of total employment) and the economy started to move towards a consumption and service based economy.
By 1971, less than 25% of US employment was in manufacturing. By 2000, it fell to 13% and today manufacturing employment hovers around 9% (more or less so for a decade).
Although NAFTA (1994) and China’s entry into WTO (2001) are regularly invoked as key events driving deindustrialization, the US manufacturing employment and GDP contribution has been on a smooth downward trend since 1945. By the time China ramped up manufacturing in mid 2000s, deindustrialization was completed and the US was already a service-based economy. You can refer to the many books on the subject published before 2010. A short list here -
- America’s Rustbelt: The Economic and Social Effects of Deindustrialization (1987)
- Beyond Rust: Metropolitan Pittsburgh and the Fate of Industrial America (1989)
- The End of Detroit: How the Big Three Lost Their Grip on the American Car Market (2003)
- The Betrayal of Work: How Low-Wage Jobs Fail 30 Million Americans (2005)
- The Great Divergence: America’s Growing Inequality Crisis (2007)
There are many reasons behind the deindustrialization of the US economy –
- Finance, tech, and healthcare have risen. The FIRE sector (finance, insurance, and real estate) is an ever bigger part of the economy; tech sector has boomed; and healthcare industry has ballooned (now accounting for 18% total GDP). Together with retail, media, entertainment, business services, education, the US economy has moved away from production to become a consumption and service based economy, i.e. the New Economy.
- High costs in the US have made manufacturing uncompetitive. The financialization of the economy has driven costs of factors of production to such a high level that makes local manufacturing simply not competitive.
This includes high labor costs (necessary to cover the overhead costs of healthcare, housing, education, etc.), high regulatory costs, high land costs, essentially all critical input costs.
At this point, the US simply cannot produce competitive goods and merchandise even for the highly paid American workers to buy, let alone export to foreign countries. Note that the US has the highest GDP per capita among major developed economies and enjoys much higher income. If the Americans cannot afford to buy local, how can consumers in Vietnam or Cambodia or even Portugal afford such?
- Technology and automation is another big factor behind the loss of manufacturing jobs in the US. Although redistribution of factory jobs to lower cost countries is often cited as the victimization of American workers, studies have shown more job losses are attributed to improved productivity and automation than offshoring.
Trump has identified deindustrialization and loss of manufacturing jobs as a national emergency. But he fails to understand the deeper underlying reasons and therefore is destined to come up with the wrong solutions.
Simply put, tariff will not make US manufacturing competitive. The inherent high cost of producing in the US means few low income foreigners can afford US manufactured goods even if the country has the production capacity and can export at zero tariff.
The world won’t buy from the US and balance its merchandise trade deficit even if it wants to.
The flip side is the US is very competitive in the services industry and therefore runs a large surplus there.
Global economy works on market-based principles, not the whim of a low intelligence reality show personality.
That said, for entertainment, let me hypothesize a few ways the US can balance its merchandise trade with China. Though unlikely to ever transpire, they are more grounded to economic reality than Trump’s fantasy.
- China can stop exporting goods made by US companies in China. Between 30 to 40% Chinese exports to the US are by US companies like Apple, Tesla, GM, Pfizer, Dow Chemical. These companies manufacture in China to sell to the Chinese market and they also export to their home market and other countries, taking advantage of the lower production costs, superior supply chains and infrastructure in China.
- China can stop the export of goods made by European, Japanese, Korean, Taiwanese companies in China to the US. This accounts for another 30% of US-bound Chinese exports. This would affect companies such as VW, IKEA, Toyota, Panasonic, SK Hynix, Samsung, TSMC, etc.
- China can stop all export of critical minerals to the US, including rare earth, cobalt, lithium, aluminum, copper. China can also stop the export of batteries, solar panels, drones, legacy semiconductor chips, mining and processing equipment, tooling machines, etc.
- China will mainly focus to export toys, apparel, shoes, furniture, luggage, plastics, home electronics, Christmas decors, etc. for Walmart and Amazon.
- China can increase US imports such as F-35 fighter jets, Patriot missiles, Virginia class submarines, M1-A1 tanks, bunker buster bombs, depleted uranium munitions, etc. After all, the US is the world leader in arms manufacturing and has an unassailable competitive advantage in this field. It should be open to sell to China to balance its trade deficit.
- China can import more Nvidia chips, Palantir surveillance software, SpaceX communication satellites, another field the US has market-competitive offerings.
- China can import more corn, beef, chicken, soybean from the US peasants – of course, eggs are off limit. The US needs them…
The optics may be bad for the American peasants to sell agricultural goods to the Chinese peasants who make manufactured stuff and lend money to the US government. But optics be damned since we are trying to balance the trade deficit.
Brilliant analysis! The US simply cannot accept it has only 4% of the world's population, that endless wars and empire building are not an industrial strategy. It is so deeply racist it cannot accept its minority position in the world order.
It was warned by George Kennan after WW ll it was only a matter of time before Asia would emerge as the major world power.
Marco Rubio is nuts when he claims the world exploited the US when it was just the opposite as the US spent the last half of the 20th trying to bully its way to "Full Spectrum Dominance" globally.
It is so utterly ironic to see the aggressor of the 20th Century claiming victim hood in the 21st.
Thirty years ago US historian Chalmers Johnson warned that the US empire was collapsing for many of the reasons as the USSR.
A whole world order is emerging and the present US leadership doesn't have the IQ or the integrity to start making the decisions that have to be made. They are so deeply revanchist it is pitiful.
A point I don't often see raised is what to me seems the most likely reason for the USA's rise as an international power. Granted the enterprising spirit of new arrivals played a major role, but the Chinese are no less enterprising - look at the number of Chinese family businesses for example, and the total absence of Chinese homelessness. Chinese take care of their families. The same can be said of India, especially the Sikhs, where their religion is as much an economic system as a spiritual pursuit.
So what accounts for the difference? Europe and Asia had long since exhausted its domestic economies through over-exploitation of resources and constant warfare over same. Two world wars were the inevitable result, not just of British Imperialism but of economic exhaustion and fierce competition for dwindling resources.
America, by contrast was a completely new land, massive in size, rich in agricultural land, mineral resources and fresh water. A wide open field. You only had to move (or kill) a couple of million native people who were still living in the stone age. Add to this the advantage of two great oceans which made it virtually impossible to invade, and you had the recipe for a century or more of economic strength. Canada shared the same advantage to a lesser degree, and the outcome was thus similar.
Anticipating a challenge by comparing N to S America, I would point out that the colonial administration of most of Latin America followed the Spanish (and Portuguese) hacienda system - basically feudalism with enslaved Indians at the bottom, mixed races in the middle, and a white minority with titles of nobility, earned or simply assumed. The USA, by contrast pursued a more progressive policy premised on individual enterprise supported by grants of free land for whoever was willing to farm it. Slavery was practised as well of course, but it was never a major factor in the westward expansion that characterized the growth of the nation. That was a wild free for all compared to the rigid system of elite property ownership inherited from the Spanish.