Why Is the U.S./China Trade Deficit So High?

The Real Reason American Jobs Are Going to China

U.S. China Trade
The U.S. trade deficit with China is the largest in the world. Illustration: Lee Woodgate/Getty Images

What Is the U.S. Trade Deficit with China?

The U.S. trade deficit with China was $367 billion in 2015  This is a new record, up slightly from last year's record of $343 billion.

The trade deficit exists because U.S. exports to China were only $116.2 billion while imports from China hit a new record of $483.9 billion. The deficit keeps growing because imports are rising faster than exports.

The United States imports consumer electronics, clothing, and machinery from China.

A lot of the imports are from U.S.-based companies that send raw materials to China for low-cost assembly. When they are shipped back to the United States, they are called imports even though they are profiting American-owned companies. (Source: "U.S. Trade in Goods With China," U.S. Census.)

Causes of the Trade Deficit

Quite simply, China can produce goods that Americans want at the lowest cost. How does China keep prices so low? Most economists agree that China's competitive pricing is a result of two factors:

  1. A lower standard of living, which allows companies in China to pay lower wages to workers.
  2. An exchange rate that is partially fixed to the dollar.

That means many American companies can't compete with China's low costs. As a result, U.S. jobs are lost. From time to time, legislators try to impose tariffs or other forms of trade protectionism against China to bring jobs back.

If this were to happen, U.S. consumers would have to pay higher prices for their "Made in America" goods.

That's why it's unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics, and clothing. For many, that's true even if it means other Americans lose their jobs.

How Is China's Standard of Living Measured?

China is the world's largest economy.

It also has the world's biggest population. That means it must divide its production between nearly 1.4 billion residents. That makes its GDP per capita $14,100. China's leaders are desperately trying to get the economy to grow faster to raise its living standards. They remember Mao's Cultural Revolution all too well. They know that the Chinese people won't accept a lower standard of living forever.

How China Manages Its Currency

China sets the value of its currency, the yuan, to equal a set amount of a basket of currencies which includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasuries to support it. In this way, the yuan's value is always within its targeted 2 percent range. For the latest updates, see Dollar to Yuan Conversion.

How It Affects the U.S. Economy

China must buy so many U.S. Treasury notes that it is now the second largest lender to the U.S. government.

(Japan is the largest.) As of October 2016, the U.S. debt to China was $1.115 trillion. That's 29 percent of the total public debt owned by foreign countries. Many are concerned that this gives China political leverage over U.S. fiscal policy since it could call in its loan. (Source: "Major Foreign Holdings of Treasury Securities, U.S. Treasury.)

By buying Treasuries, China helped keep U.S. interest rates low. That helped fuel the U.S. housing boom, leading to the subprime mortgage crisis. If China were to stop buying Treasuries, interest rates would rise. That could throw the United States and the world back into the recession. It isn't in China's best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying almost as many Treasuries as ever.

The U.S. trade deficit with China means that U.S. companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. Many businesses reduced their costs by outsourcing jobs to India and China, adding to U.S. unemployment. Other industries have just dried up. U.S. manufacturing, as measured by the number of jobs, declined 34 percent between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace. (Source: "Employees by Industry," Bureau of Labor Statistics.)

What Is Being Done?

In 2016, U.S. Treasury Secretary Jack Lew continued the U.S.-China Strategic Economic Dialogue. It discusses with China the U.S. desire to loosen its peg against the dollar. That would raise the price of Chinese exports. It also seeks to open up to U.S. companies China's domestic market. Both of these actions would lower the trade deficit. 

The Dialogue was started in 2006 by former Treasury Secretary Henry Paulson. Since then, China allowed the yuan to rise 16 percent. It also opened many Chinese markets to U.S. industries. (Source: "A Strategic Economic Engagement," Foreign Affairs, Sept/Oct 2008.)  

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  3. Financial Account

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