US Trade Deficit With China and Why It's So High

The Real Reason American Jobs Are Going to China

Custom illustration showing trade deficit with China

The Balance 

The U.S. trade deficit with China was on pace to close out 2019 at about $353 billion, according to figures through October of 2019. This would be about 15% less than 2018's $419 billion deficit.

The trade deficit exists because U.S. exports to China were only $87.6 billion through October while imports from China were $382.1 billion, a difference of $294.5 billion for the 10-month period.

Through 2018—the most recent full year of data available, as of January 2020—the biggest categories of U.S. imports from China were computers and accessories, cell phones, and apparel and footwear. 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 U.S. are commercial aircraft, soybeans, and autos. 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.

Annual Trade Deficit

The U.S. trade deficit with China was $315 billion in 2012, rose to $367.3 billion by 2015 before dropping to $346.9 billion the next year. Within just two years, it had increased to $419.2 billion before this year's projected drop.

Causes

China produces many consumer goods at lower costs than other countries, and buyers, including those in the U.S., are drawn to low prices. 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.

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. China’s GDP per capita was $16,186, or about 91% of the worldwide average.

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. 

In 2016, China began relaxing its peg. It wants market forces to have a greater impact on the yuan's value. As a result, the dollar to yuan conversion has been more volatile since then. China's influence on the dollar remains substantial.

Effect

China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest. As of October 2019, the U.S. debt to China was $1.1 trillion. That's 27% 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 U.S. 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 U.S. and China that would be signed on Jan. 15, 2020. Details of the agreement were not released.

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Article Sources

  1. The United States Census Bureau. "Trade in Goods with China," accessed Jan. 3, 2020.

  2. The United States Census Bureau. "U.S. Imports from China by 5-digit End-Use Code 2009 - 2018," Accessed Nov. 29, 2019.

  3. The United States Census Bureau. "U.S. Exports to China by 5-digit End-Use Code 2009 - 2018," Accessed Nov. 29, 2019.

  4. Trading Economics. "China's GDP," accessed Jan. 3, 2020.

  5. United States Department of the Treasury. "Major Foreign Holders of Treasury Securities (in billions of dollars) Holdings 1/ at End of Period," Accessed Jan. 3, 2020.

  6. Federal Reserve Bank of St. Louis Economic Research. "Manufacturing Jobs," accessed Jan. 3, 2020.

  7. The White House Briefing Statements. "President Donald J. Trump Has Secured a Historic Phase One Trade Agreement with China," accessed Jan. 3, 2020.