Trump Reached Consensus With China to ‘Substantially Reduce’ Trade Deficit

By Stefan M. Kløvning

After a fierce critique by President Trump about being ‘ripped off’ by China for the massive trade deficit between the U.S. and China, a consensus was reached between the countries in negotiations on 17-18 May to ‘substantially reduce’ it. This has been a goal for Trump since his campaign, saying on the campaign trail, ‘China is responsible for nearly half of our entire trade deficit. They break the rules in every way imaginable.’ Reducing the deficit has therefore been called a ‘core campaign promise’ which he has now made a big step towards achieving.

According to census.gov, the United States had a $375,000 million trade deficit with China in goods in 2017, an increase from the average $350,000 million annually between 2013-2016. From the available data provided by the governmental website, there has never been such a large trade deficit between the countries before. In 1985, the first year provided data from, there was a trade deficit of $6 million dollars, and it has mostly only increased therefrom. The year later, for instance, it had increased by a factor of 277 to $1,664 million. This massive deficit, in the eyes of Trump, is undermining America as a global power and must be changed, which he has made efforts to do in these negotiations.

Many are critical to his focus on China, however. Joseph E. Stiglitz is one of them, an economist who received a Nobel Prize in Economics in 2001 and over 40 other honorary degrees for his work on economics. In 6. April he wrote a piece for Market Watch exclaiming,

Even if Trump had no economists advising him, he would have to realize that what matters is the multilateral trade deficit, not bilateral trade deficits with any one country. Reducing imports from China will not create jobs in the U.S.

Rather, it will increase prices for ordinary Americans and create jobs in Bangladesh, Vietnam, or any other country that steps in to replace the imports that previously came from China. In the few instances where manufacturing does return to the U.S., it will probably not create jobs in the old Rust Belt. Instead, the goods are likely to be produced by robots, which are as likely to be located in high-tech centers as elsewhere.

Trump wants China to reduce its bilateral trade surplus with the U.S. by $100 billion, which it could do by buying $100 billion worth of U.S. oil or gas. But whether China were to reduce its purchases from elsewhere or simply sell the U.S. oil or gas on to other places, there would be little if any effect on the U.S. or global economy.

Trump’s focus on the bilateral trade deficit is, frankly, silly.

This goes directly counter to the claim made in the press release of the negotiations the month after that ‘To meet the growing consumption needs of the Chinese people and the need for high-quality economic development, China will significantly increase purchases of United States goods and services. This will help support growth and employment in the United States.’

Moreover, the trade figures have also been accused of being misleading and based on outdated methods of data collection and calculation. Dominic Ng, the CEO of East West Bank in California, elaborates in a piece for China Business Review that

Statistics traditionally used to measure trade flows do not fully reflect the globalization of production chains. Currently, statistical agencies pin the entire trade value of a product to the last place it was exported from, even though the parts in the product come from many other countries. This method of data collection is based on the International Monetary Fund’s Balance of Payments Manual, which was first released in 1948, and never appropriately overhauled to reflect the new complexities of global value chains.

He mentions the classic example of the iPhone, where Apple takes care of the design, marketing and software creation in the United States; displays are manufactured in South Korea, Japan and elsewhere; processors come from the United States; touch ID sensors are made in Taiwan, and barometric pressure points come from Germany. Whereas the final assembly point is in China.

Because of this, even though the assembly and parts cost of the iPhone in China is only a tiny fraction of the total manufacturing cost, the entire import cost of the iPhone is attributed to China in U.S. trade statistics. These distortions add up—assuming 35 percent of the 215 million iPhones sold globally in 2016 were imported for sale in the United States at a cost of $230 each, the iPhone alone added $17 billion to the 2016 trade deficit with China, even though the vast majority of its inputs came from elsewhere.

He also highlighted the fact that in trade of services with China, the United States has a massive surplus, and that too much focus has been placed on the trade of goods. According to statistics by the United States International Trade Commission, U.S. exports of services to China had a total value of $47.9 billion in 2015 and only $15 billion in imports.

The comments made by Professor Stiglitz came two days after Trump wrote on Twitter

Economists don’t agree with Trump’s proposition that you cannot lose in such circumstances. This seems to have been Trump’s justification for instating tariffs on foreign steel and aluminum, insisting that ‘a tariff on a small fraction of imported steel — the price of which is set globally — will suffice to address a genuine strategic threat.’ according to Stiglitz. French Economist Claude Fréderic Bastiat joked in 1848 about the absurdity of calling the balance of trade a representative of the country’s capital. ‘According to the theory of the balance of trade, France has a very simple means of doubling her capital at any moment. It is enough to pass [trade ships] through the Customhouse, and then pitch them into the sea. In this case, the exports will represent the amount of her (France’s) capital, the imports will be nil, and impossible as well, and we shall gain all that the sea swallows up.’ Afterward he exclaims in response to potential claims by the Protectionists of it only being a joke, ‘You do give utterance to them, however, and, what is more, you act upon them and impose them on your fellow-citizens to the utmost of your power (Bastiat 2011: 224-5).’ 170 years later, we see the same thing still being done and the same theory being espoused by the President of the United States – one of the most powerful men in the world.

What’s worse is that if the New York Times is correct in reporting that ‘Economists said the growing trade deficit stemmed largely from the strength of the United States economy, which helped American consumers afford more imported electronics, clothes, and appliances,’ also raises the question of whether an attempt to lower the deficit will have the opposite effect, i.e. weaken the U.S. economy.

The argument against protectionism – i.e. Trump’s tariffs, which was Trump’s primary means of lowering the deficit before these negotiations – is essentially that it puts the producer before the consumer. Companies in the untampered market have to deal with offering cheaper and higher quality goods and services than their competition according to the laws of supply and demand. If we use France and the United States as an example, say France had companies producing a good cheaper, of higher quantity and quality, and with a technological advantage over their competition in the United States. The protectionist position is that that good should be tariffed in the United States to the advantage of the American companies. The American consumer is the loser here, not the French producer. The consumers unnecessarily have to pay more for the French good of a higher quality than the American one, and the producers disregard the law of supply and demand through the aid of the government, getting the ability to avoid change and rather sticking with what they have produced hitherto. If the time and resources the American company put into this was rather used according to the laws of supply and demand, and tariffs where avoided, the American consumer would both have better access to the superior French good, and of whatever other the American producer decides to use the time, labour and resources on. Trade lifts the burden for the production of what is better and more efficiently produced in another country, and gives the other country an advantage in the possibility of using their time, resources and labour on something more urgent if they take the opportunity rather than picking up a fight about it. With respect to capital, tariffs also hurt the American industries dependent on foreign imports. This is highlighted by a report by Vox claiming that ‘Trump’s steel tariffs are hated by almost every US industry. Except steel,’ listing construction and architecture firms, U.S. car dealers, auto manufacturers, boat manufacturers, the beer industry, retailers, machinery manufacturers and U.S. business groups as examples. The steel and aluminium industries are, of course, satisfied, because they don’t need to bother following the laws of supply and demand, even though that’s their duty as producers.