US Trade Deficit With China and Why It's So High
The Real Reason American Jobs Are Going to China
The U.S. trade deficit with China in 2019 was $345.6 billion. That's 18% less than 2018's $419.5 billion deficit. The trade deficit exists because U.S. exports to China were only $106.6 billion while imports from China were $452.2 billion.
The biggest categories of U.S. imports from China were computers, cell phones, apparel, and toys and sporting goods. A lot 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.
China's biggest imports from the United States are commercial aircraft, soybeans, and semiconductors. In 2018, China canceled its soybean imports after U.S. President Donald Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods. By 2019, soybean imports had doubled to $8 billion, still less than the $12 billion imported before the trade war.
- In an effort to manage the large U.S. trade deficit with China, President Donald Trump began imposing import tariffs on Chinese imports in 2018.
- Low-priced consumer goods produced in China has been dominating American importation 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, rose to $367.3 billion by 2015 before dropping to $346.8 billion the next year. By 2018, it had increased to $419.5 billion, before falling to $345.6 billion in 2019.
China produces many consumer goods at lower costs than other countries, and 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 dollar
If the United States implemented trade protectionism, U.S. consumers would have to pay higher prices for their "Made in America" goods, so it’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics, and clothing, even if it means other Americans lose their jobs.
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. A common way to measure the standard of living is gross domestic product per capita. In 2018, China’s GDP per capita was $18,236.
China sets the value of its currency, the yuan, to equal the value of a basket of currencies that 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. Treasurys to support it.
China must buy so many U.S. Treasury notes that, up until June 2019, it was the largest lender to the U.S. government. Japan is currently the largest. As of November 2019, the U.S. debt to China was $1.09 trillion. That's 16% of the total public debt owned by foreign countries.
Many are concerned that this gives China political leverage over U.S. fiscal policy and worry about what would happen if China started selling its Treasury holdings. It also would be disastrous if China merely cut back on its Treasury purchases.
By buying Treasurys, China helped keep U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise. That could throw the United States into a recession. But this wouldn’t be in China's best interests, as U.S. shoppers would buy fewer Chinese exports.
U.S. companies that can't compete with cheap Chinese goods must lower their costs or go out of business. Many businesses reduce their costs by outsourcing jobs to China or India. U.S. manufacturing, as measured by the number of jobs, declined 35% between 1998 and 2010, before rebounding by about 12% from then through the end of November 2019. Overall, manufacturing jobs in the United States have declined by about 27% since 1998.
What's Being Done
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. In response, China canceled all import contracts for soybeans.
Trump's tariffs have raised the costs of imported steel, most of which are from China. The tariffs came a month after Trump imposed tariffs and quotas on imported solar panels and washing machines. China has become a global leader in solar panel production. The tariffs depressed the stock market when they were announced.
The Trump administration's protectionist measures are intended, in part, to pressure China to remove requirements that U.S. companies transfer technology to Chinese firms. China requires companies to do this to gain access to its market.
On Dec. 13, 2019, Trump announced a trade deal between the United States and China. It was signed on Jan. 15, 2020.
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