Trade deficits are not inherently bad for an economy. Countries are limited in their resources, goods, and services for many reasons; it is typical to reach out to neighbors and establish trade relations. Over time, countries create differences in the amounts they trade with each other. The United States and China have had to overcome many differences to establish and maintain their trade relationship.
The U.S. trade deficit with China for 2020 was $310.8 billion—9% less than 2019's $345.2 billion deficit. The trade deficit exists because U.S. exports to China were only $124 billion, while imports from China were $435.5 billion.
Learn why the U.S.—China trade deficit sits at its current level and what's being done about it.
- China remains a global player in the competition for world economic and trade leadership, challenging the U.S. for the top country spot.
- Low-priced consumer goods produced in China have been dominating American imports over the years.
- China can manufacture many goods at competitive prices, because of two comparative advantages: lower standards of living, and a partial pegging of the yuan to the dollar.
- To keep export prices low, China buys a large volume of Treasurys. It has become one of the largest lender nations to the United States, currently second only to Japan.
Annual Trade Deficit
The U.S. trade deficit with China was $315.1 billion in 2012 and rose to $367.3 billion by 2015 before dropping to $346.8 billion the following year. By 2018, it had increased to $418.9 billion before falling to $345.2 billion in 2019. At the end of 2020, the deficit with China had dropped to $310.8 billion, the lowest since 2011.
What Causes the U.S.—China Trade Deficit?
China produces many consumer goods at lower costs than other countries can. Buyers, including those in the United States, are drawn to low prices. Most economists agree that China's competitive pricing is a result of two factors:
- A lower standard of living, which allows companies in China to pay lower wages to workers
- An exchange rate that is partially fixed to the value of the dollar
China is the world's largest economy and has the world's largest population. It must divide its production among almost 1.4 billion residents. This is four times the number of people in the U.S. China sits at close to $14.3 billion in gross domestic product, while the U.S.'s GDP is just over $21.4 billion.
China has a much lower gross domestic product per capita, which economists use to measure standard of living. In 2019, its GDP per capita was $16,804, while the U.S. figure sat at $65,298.
Labor, goods, and services in China are therefore much cheaper than in the U.S. If the United States were to implement tariffs or other policies that influence government agencies and consumers to purchase goods and services made at home, U.S. consumers would have to pay higher prices.
Most people would rather pay as little as possible for computers, electronics, and clothing—so the U.S. imports much more than it exports to China. U.S. businesses also use Chinese labor to assemble or manufacture products to reduce production costs.
In a nutshell, the trade deficit with China is caused by the country's lower costs of labor and American demand for the goods produced there.
The largest categories of U.S. imports from China are computers, cell phones, apparel, toys, games, and sporting goods. Many of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.
Top United States exports to China are soybeans, semiconductors, industrial machines, crude oil, and passenger cars. In 2018, China canceled its soybean imports after U.S. President Donald Trump imposed tariffs on Chinese steel exports and other goods. By 2020, soybean exports to China had bounced back to $14 billion.
Effects of the Trade Deficit
U.S. companies that can't compete with cheaper Chinese goods must find ways to cut costs to stay competitive. As a result, U.S. manufacturing (measured by the number of jobs) declined by 35% between 1998 and 2010, before rebounding by about 7% through the end of 2020. Overall, manufacturing jobs in the United States have declined by about 30% since 1998.
High trade deficits can lead to economic hardship, place jobs and capital outside of a country, and create trade wars as countries work to balance their partnership.
Trade imbalances become an issue when there isn't a relatively equal amount of trade between trading partners. For example, the U.S. feels that China isn't living up to its trade obligations, and thus that actions need to be taken. These usually result in trade embargoes or tariffs that can raise the costs of imports for the offending nation.
The U.S. economy is affected by the trade deficit. Jobs and capital are moved offshore, causing financial difficulties for consumers and smaller businesses. The tariffs imposed by the administration have been paid by U.S. companies, for the most part, further costing them $46 billion after losing over $1.7 trillion in stock values.
China is also one of the leading holders of U.S. Treasuries, which it purchases to reduce the value of its currency, thus allowing it to maintain a low exchange rate with the dollar. U.S. consumers benefit from low prices, and the government and economy benefit from capital being invested into the country.
What's Being Done
President Donald Trump enacted a 25% tariff on steel imports and a 10% tariff on aluminum that went into effect on July 6, 2018, impacting $34 billion worth of Chinese imports.
On December 13, 2019, Trump announced a trade deal between the United States and China, in which both countries agreed to increase certain imports and exports. He signed it on January 15, 2020.
President Joe Biden, elected in November 2020, retained Trump's position on trade with China early in 2021 as his administration reviewed the former administration's policies.
President Biden also publicly proclaimed that he would take measures to ensure the U.S. remained the top economy and power in the world. His new policies will address China's unfair trade practices, forced-labor programs, unfair import and export subsidies, censorship, and illicit use of American intellectual property.