Executive Summary
In 2007, China became the top exporter of goods to the United States. America’s growing trade
deficit kept soaring high and became a serious matter of concern for the US government. In
2018, President Trump began setting tariffs and other trade barriers on China with the intention
to create changes in order to correct unfair trade practices, growing trade deficits, forced
transfer of American technology to China, and the theft of intellectual property. US trade deficit
with China has increased significantly. This signifies that the US is importing much more than
what it exports to China. This benefits the Chinese economy but not the US. Over time, higher
trade deficits weaken the domestic industries and decrease employment opportunities.
Imposing tariffs on China is not the best solution to control trade deficits. Imposing tariffs has
produced some good results at the macroeconomic level; however, it has also caused damage
to several US businesses and to thousands of people who lost jobs. This brutal trade war
between both China and The United States has provoked a global manufacturing recession in
many different ways. I assess that the variables that impact the US trade deficit with China, are
three of China’s important economic indicators – gross domestic product (GDP) in China,
consumer price index (CPI) in China and China’s net balance in trade in goods and services
with the entire world. This report aimed to investigate whether US trade in goods with China
is affected by China’s economic indicators. This report also studies what is enabling China to
be in such a position. Finally, what are the variables responsible for China’s success in
becoming the top exporter of goods to the US?
Background
America and China trade war were one of the most frequently appeared news in the
year 2018 and 2019. The war continues to this year, 2020. In 2018, the US accused China of
unfair trading practices, stealing intellectual property, and unfairly favoring domestic
companies through subsidies. The US also wanted China to buy more US goods to rein in its
massive $419 billion trade deficit with China (Palumbo & Costa, 2019).
In recent years, the US trade deficit with China has increased significantly. A trade
deficit occurs when a country’s imports exceed its exports in a specific year. This signifies
that the US is importing much more than what it exports to China. This benefits the Chinese
economy but not the US. Over time, higher trade deficits weaken the domestic industries and
decrease employment opportunities. In some cases, it can be responsible for weakening the
domestic currency. The US, therefore, decided to control this situation by imposing tariffs on
250 billion worth of Chinese goods in 2018 (Palumbo, D., & Costa, A. N. da., 2019).
Figure 1: US Trade with China – The deficit has soared since 1985
To understand what causes these deficits to grow this significantly, I believe we need
to study the economic factors that are enabling China to export such a massive amount of
goods to the US. Therefore, I will investigate whether US trade in goods with China is
affected by China’s economic indicators – gross domestic product (GDP), consumer price
index (CPI), and China’s net balance of trade in goods and services.
https://www.bbc.com/news/business-48196495
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Figure 2: US Trade deficit with China
Problem
As discussed above, having a huge trade deficit is not vital for the economy especially in the
long run. The problem that the US is facing is how to control and decrease its trade deficit
with China. Why China?
U.S imports half of its total volume of goods from five countries – China, Canada,
Mexico, Japan, and Germany. In 2007, China took over Canada and became the top exporter
of goods to the US (Amadeo, 2020). The reason why the US imports such massive quantities
of goods from China is because China produces several consumer goods at lower costs than
other countries. Buyers in the US just like in all other countries are drawn to low prices. If the
US stops importing goods from China, the US consumers would have to pay higher prices for
the goods that are produced at a higher cost in America (Amadeo, 2020).
The largest part of Chinese goods is being sold to the USA. According to 2017 data,
China’s top exports to the USA were – broadcasting equipment ($231B), computers ($146B),
office machine parts ($90.8B), integrated circuits ($80.1B) and telephones ($62B). All these
goods are extremely important for US public and business enterprises. Manufacturing these
products at a low cost compared to China is almost impossible for the US (Fordham, 2020).
China, on the other hand, does not import as much from the US causing the US trade deficit
with China to grow extremely high. Problem – what should the USA do? Several economists
agree that imposing tariffs is not going to solve this problem. Such trade policies cannot
reverse the trade deficit trends (Swanson, 2018). We need to build a better and deeper
understanding of what puts China in such a dominating position.
Purpose
Imposing tariffs on China as several economists believe is not the best solution to
control the trade deficits. Here are the implications: “Factories in Michigan lost more than
4,000 jobs in the first nine months of the year. Wisconsin factories lost more than 7,000 jobs.
And Pennsylvania suffered the nation’s biggest factory job losses with 7,400. ACF Industries
announced in November that it was cutting 148 jobs at its train car factory in Milton, Pa.”
(Horsley, 2019).
https://www.thebalance.com/u-s-china-trade-deficit-causes-effectsand-solutions-3306277
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Although the policy has produced some good results at the macroeconomic level, it
has also caused damage to several US businesses and to thousands of people who lost jobs. I
strongly believe there is a better way to address this issue. If I know the factors that
strengthen China’s position in the world market in a specific year, I can predict the US
balance of trade in advance and try to control it by adjusting our policies for import,
international collaborations, and domestic production. In this research, therefore, I am trying
to investigate what is enabling China to be in such a position, what are the variables
responsible for China’s success in becoming the top exporter of goods to America.
The purpose of this report is to get a deeper understanding of China’s three important
economic indicators (gross domestic product (GDP), consumer price index (CPI), and
China’s net balance of trade in goods and services) and their role in increasing US trade
deficit in goods with China. The trade deficit is governed by macroeconomic factors of a
specific country including its relative growth rates, the value of its currency, and its savings
and investment rates (Swanson, 2018). As China’s growth increases, its inflation is
controlled, and as it invests more in production (including what it exports), it gains the
dominating position in the global marketplace.
This report will contribute to developing an understanding of China’s strengths and
weaknesses that will help the US to predict its trade patterns with China in advance and
formulate better domestic production, import, and international collaboration policies.
The US Trade in Goods with China
America and China have been in an endless cycle of good and bad terms when it
comes to trading with one another. Back in July 2019, The US has slightly narrowed its trade
deficit, but with China, it has reached its peak within the past six months. Back in September
2019, both countries feared a recession would happen, so they both decided to establish
tariffs for each other. This trade war does not seem like there is going to be a “winner”
anytime soon because, for The United States, exports to China have dropped 3.3% while
imports jumped to 6.4% (Mutikani, 2019). Both countries have drastically been impacted by
the trade war because both countries have faced a restriction of trade flow between each other
after all these tariffs have been passed.
This brutal trade war between both China and the US has provoked a global
manufacturing recession in many different ways. For example, The United States put 15%
tariffs on more than $125 billion Chinese imports, and China put an additional 5% on The
United States’ crude oil and other imports. Many businesses have been affected by this trade
war between the two countries; an example would be the US farmers because China has
stopped buying from US farmers. Jeffry Bartash said Why the U.S-China Trade Deficit is so
huge: Here’s all the stuff America Imports, “The simmering trade war between the US and
China has led both sides to raise tariffs, but the lopsided trade relationship between the two
countries means the impact will fall heaviest on Chinese producers and American consumers
and farmers.” (Bartash, 2019). Since a lot of the products that American consumers buy are
from China, the high tariffs that are being implemented are not allowing American’s to
purchase these products which leads to their daily lives being affected. Both countries rely on
each other to keep their economy afloat and by pushing for these tariffs, it will slowly hurt
the global economy.
Gross Domestic Product (GDP) in China
China’s GDP has drastically grown over the years and it is continuing to grow at a
rate that is faster than nineteen Euro nations combined. Gross domestic product is calculated
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based on the total market value of the total finished goods and services a country can
produce. Every country’s GDP is different, and it is used to show how well that specific
country is doing financially. The importance of GDP shows a lot about a country; if the GDP
for a country is rising, then economists would know that income and consumer buying is also
increasing. On the other hand, if GDP is decreasing, then it shows that there is a lot of
unemployment or even a possible recession. According to the National Bureau of Statistics of
China, “The national economy was generally stable with main projected targets for
development achieved, which laid a solid foundation for completing the building of a
moderately prosperous society in all respects.” (National Bureau of Statistics of China, 2020).
The country as a whole has to figure out what can bring their GDP up and when the country
targets their strongest points, and for China, they targeted their supply-side structural reform,
and they strengthened their end for domestic and foreign investments, foreign trade, and
market expectation to name a few. Comparing China’s industrial enterprises from 2019 to
2018 it has grown by 5.7%.
It is very important for a country to not only invest in other countries but have other
countries invest in them. “…; enterprises funded by foreign investors or investors from Hong
Kong, Macao, and Taiwan up by 2.0 percent; and private enterprises up by 7.7 percent.”
((National Bureau of Statistics of China, 2020). A big attraction for foreign investors to go
into China would be their population. Since China is such a big country, there are a lot of
opportunities for investors in the healthcare, technology, and luxury goods industry. By
allowing foreign investors into the country, it will drive the GDP higher because it shows that
the country as a whole is doing well and that other countries continue to want to put money to
help improve the country. China has invested a lot more in its fixed assets and shown steady
growth and investments in its high-tech industries which highly impacted their GDP growth.
Comparing China’s investment from 2018 to 2019, it grew about 5.4% and the growth it
experienced in their technology industry grew 17.3%. Foreign trade can also show how it
heavily impacts a country’s GDP. When there is a higher export rate than import rate, it will
drive the country’s GDP up and in this case with China, their export rate in 2019 was 5%
while their import rate was only at 1.6%; this big gap in their export and import rate is an
important reason why their GDP has gone up within the year (Every CRS Report, 2020).
Many factors play a big part in China’s growing GDP and as long as they are going to do
what they did back in 2019, the rest of the world will only continue to see it rise.
Consumer Price Index (CPI) in China
Consumers play a big part in building the economy and when they are not going out
and shopping as much due to inflation, it negatively affects the country. Throughout the past
eight years, China experienced a high of 4.5% in their CPI back in November and December
2019 which was 2.9% more than it was last year. This high CPI was driven by a shortage in
pigs which led to higher prices in their pork due to the African swine flu that affected a
majority of their pigs. A consumer price index measures the weighted average of prices of
consumer’s goods and services. This could be found by taking the price of the specific item
and multiplying it by the price of the same item from the base year (Tan, 2019). According
to CNBC’s China’s December Consumer Inflation Still High, Not Seen Hindering Central
Banking Ease, “Pork prices jumped 97% year-on-year in December, data showed, accounting
for 2.34 percentage points of the CPI increase” (Lusha Zhang, 2020).
The increase in the price of pork also occurred during the time where people started to
prepare for Lunar New Year’s which is another factor that continued to drive the prices up.
China’s investors were worried about their consumer inflation being at their highest because
this could cause China’s banks to be more cautious about the amount of money they are
putting out into the public. On the other hand, producer’s price inflation dropped around
0.8% which indicates that China’s economy is slowing down due to the trade war with The
United States. However, since China is so big and they have resources, these tariffs will only
limit so many products going in because their demand for goods and services is not as strong
(Chang, 2019). CPI affects the economy as a whole and especially when both China and The
United States are in a trade war, it will weaken both countries’ economies.
China’s Trade in Goods and Services
China has grown to be one of the biggest world traders, but it has not always been this
way. China exceeded The United States in being the top world trader back in 2013 with about
7.6% more than it recorded in 2012 (Blazyte, 2020). Back in 2018, China’s total trade in
goods was at 12.4%, and The United States followed by 11.5% (China Power Team, 2020).
In 2018, the trade between China and The United States grew and China’s export to The
United States was a record high of $480 billion. However, China imported only $156 (7.3%
of all its imports) from the US. China’s trade with Hong Kong and The United States are a lot
more excessive than China with the rest of the world. In 2018, China exported $1.71 trillion
and imported $1.97 trillion in goods excluding its trade with the US and Hong Kong (China
Power Team, 2020). From this, you can imagine the magnitude of China’s trade with these
two countries. With the US, the trade is not very balanced since China exports much more
than what it imports. With the rest of the world, China’s trade is much more balanced.
The scenario in terms of China’s trade in services is different. The value of services
imported by China grew from $36 billion to $470 billion between 2000 to 2017. With the
Chinese economy getting more matured, the demand for services has increased. China
imports most of these services from advanced economies. Unlike trade-in goods, China’s
trade in services favors the US as China imports more services from the US than it exports. In
2017, China imported $57.6 billion in services from the US while it exported only $17.4
billion to the US (China Power Team, 2020).
Assumptions
Based on my research, a few assumptions can be made as to why America and China are in a
trade war:
- China’s gross domestic product (GDP) impacts US trade in goods with China. As
China’s economy grows (as reported by higher GDP), it produces higher quantities of
goods and exports them to the US that increases US imports from China causing
higher trade deficits. - China’s consumer price index (CPI) impacts US trade in goods with China. As China
reports higher inflation rates through CPI, it’s production capacity declines and it
exports a lesser quantity of goods to the US. This helps the US to reduce its trade
deficit in goods with China. - China’s overall trade in goods and services impacts US trade in goods with China.
When China’s net balance of trade with the world increases, the US trade deficit in
goods with China also increases. As China exports to the entire world increase, it also
exports higher quantities of goods to the US resulting in reports of higher trade
deficits in goods with China.
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Conclusion
In recent years, China has grown to be one of the biggest world traders, but it has not
always been this way. As the economy rises in China and they report higher GDP, they are
able to produce larger quantities of goods to export to the United States. As the GDP
increases with a surplus in trade, the total value of goods and services that domestic
producers sell abroad begins to exceed the total value of foreign goods and services that the
domestic consumers will buy.
America and China have been extremely impacted by the trade war because both
countries have faced a restriction of trade flow between each other after tariffs have been
passed. This brutal trade war between both China and The United States has provoked a
global manufacturing recession in many different ways. Since a lot of the products that we
Americans consume are from China, the high tariffs that are being implemented are not
allowing American’s to purchase these products which leads to their daily lives being
affected.
Tariffs affect the economy as a whole and especially when both China and The United
States are in a trade war, it will weaken both countries’ economies. Essentially, America and
China both rely on each other to keep their economy afloat and by pushing for these tariffs, it
will slowly hurt the global economy. There is a positive way forward, given the desperate
state of our trading relationship with China.
Recommendations
This report is aimed at finding solutions to stop the trade war between the US and
China. After this exhaustive research, we can see that there is most definitely a solution to
this trade war. I am not sure what Trump Administration wants or what are they willing to
give up in order to come back to the negotiating table. And the same applies to China, what is
leader Xi Jinping’s goals toward resolving this trade war. Both countries have to understand
that there is some reasonable bargaining involved in order to fix this economic relationship.
Both countries have to understand that this trade war is pointless and counterproductive. At
the end of the day producers and consumers lose out, both in America and China due to this
trade war.
As my key recommendations, first, I would recommend the Trump Administration to
define what looks like a good trade agreement between the two countries. Then, any
negotiations that will follow together with the subsequent Chinese actions must be assessed
according to the intended outcome that the Trump Administration originally defined.
Second, I would suggest both US and China resume trade dialogs. Delegates should
come to a consensus on reducing trade blockades and strengthening the economic
relationship. This will enable both countries to compete equally and transparently.
Third, Approach the trade talks with an optimistic, incentive-laden structure/package
and series of milestones that resolve issues at the root of trade tensions effectively. Hitherto
the policy of the Trump administration has been largely retaliatory. The Trump
administration has to understand that China cannot be seen as capitulating to global demands
and will not; unless the trade deal is a win-win situation for both the countries.
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Finally, the US must make more effective use of our allies. History has shown us that
multilateralism is an established strategy that has proven to have a positive outcome.
Working with our allies strategically, we can most definitely define communication/trade
expectations we demand from China. This will keep them accountable in a more productive
manner. In the end, this approach will induce favorable behavior and a constructive burden
on China to make a trade deal with the US.
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References
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Retrieved from The Balance: https://www.thebalance.com/u-s-china-trade-deficitcauses-effects-and-solutions-3306277
Blazyte, A. (2020, July 17). Trade balance of goods in China. Retrieved from Statista:
https://www.statista.com/statistics/271637/monthly-trade-balance-of-china/
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