US must increase its own productivity to reduce its trade deficit with China

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  • The US economy relies heavily on consumer spending, a growth model that naturally benefits China when so many of the things that Americans buy are made there
  • Instead of blaming this situation on China, the US must shift its own focus from propping up consumers to supporting productivity-driven growth

There’s a long way to go before the US-China trade war ends and time is running short before the 2024 US presidential elections, when trade relations between Washington and Beijing are bound to sour.

The US is on course for a bumper US$400 billion trade deficit with China in 2022. It’s not as big as the record US$418 billion in 2018, but still big enough to set off alarm bells that trade frictions could soon be on the rise again and despite recent hopes for a political thaw between the two nations.

Solving the trade gap will be no easy task with both sides eager to lay the blame on the other for its cause. But efforts to tackle it over the long term must succeed, to help redress imbalances in the world economy, reduce trade protectionism and restore order to global financial stability. It’s a goal worth striving for; if differences can be set aside, it would pave the way for stronger global growth in the process.

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It might sound provocative to many Americans, but Beijing isn’t entirely to blame for the huge US-China trade gap. It may be an easy excuse to accuse China of dumping cheap goods, committing anticompetitive trade practices and manipulating a cheap renminbi exchange rate, but the root of the deficit is the failure of successive US governments to redress key shortfalls in the economy that have led to the black hole in the US’ external trade figures and associated big budget deficits over many decades.

And don’t forget it was former US president Donald Trump who fired the first shots in the trade war by levying steep punitive tariffs on imports from China in early 2018, which triggered retaliatory trade sanctions from Beijing and provoked a row which has badly backfired on global growth.

The US is much too dependent on a growth model which is mainly driven by consumer demand, accounting for up to 70 per cent of US gross domestic product. Quite simply, the US consumes too much of the goods which China is extremely successful at manufacturing.



US-China trade deficit


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US-China trade deficit

China meets the shortfall in demand which US producers fail to meet domestically, and this has proved an invaluable safety valve against domestic overheating and higher inflation risks.

It may be simple to ratchet up US growth with easy money and faster fiscal reflation to boost consumer confidence and spending, but the trouble is a good part of the extra stimulus ends up in the order books of China’s exporters.

It is exactly the same story for Germany and its European partners as part of the US’ overegged domestic demand also ends up as a hefty trade deficit with Europe worth around an estimated US$230 billion in 2022. Clearly, it’s a common theme which the US must address with better options than trade levies and sanctions.

US trade war with China is causing a rift with Europe

China is already taking steps to move its economic model away from dependence on export growth towards more domestic-driven growth under its dual circulation strategy, but it’s a matter of conjecture how much difference it will make to future US-China trade flows.

China suffered a 9.9 per cent year-on-year drop in exports in December but it’s a temporary setback due to the current downturn in global demand conditions and unlikely to offer an easy get-out-of-jail card for the US.



Vehicles await shipment at Yantai Port in Yantai, Shandong province, on February 18. China suffered a 9.9 per cent year-on-year drop in exports in December but it's a temporary setback due to the current downturn in global demand conditions. Photo: Xinhua


© Provided by South China Morning Post
Vehicles await shipment at Yantai Port in Yantai, Shandong province, on February 18. China suffered a 9.9 per cent year-on-year drop in exports in December but it’s a temporary setback due to the current downturn in global demand conditions. Photo: Xinhua

US policymakers have their work cut out fine-tuning aggregate demand in such a way as to promote sustainable growth, encouraging a better supply-side response from industry without harming consumer confidence in the process. Reducing the budget deficit and cutting the government’s massive debt mountain are high priorities. US taxes need to go up and difficult spending decisions must be made. Industrial investment must be encouraged rather than squeezed out by public sector spending.

The US needs a better industrial strategy as market forces are coming up short and in dire need of overhaul. The US growth model needs less stress on propping up consumers and prioritising capital-intensive, productivity-driven growth instead. US President Joe Biden’s pledge to commit up to US$370 billion of green subsidies for eco-friendly products made in America is a step in the right direction to support US domestic manufacturing.

Unless action is taken soon, the trade deficit with China and the rest of the world is only going to get worse, raising greater political tensions in the process. It’s time to stop the blame game and take positive steps to end the trade war before it blows up into a bigger crisis.

David Brown is the chief executive of New View Economics

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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.

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