Bilateral Trade Balances: The China-U.S. Trade Deficit

In recent months, criticizing U.S. production capabilities and the Chinese government’s manipulation of its currency has become all the rage. Not to mention that there seems to be some merit to the growing concern over our seeming ineffectiveness to compete with China in manufacturing and other industries.

Here’s a quick graph of the U.S.-China monthly trade balance I put together on excel using government-supplied data:

Source of data.

This is an example of a bilateral trade balance. The U.S. bilateral trade balance with China equals our total exports to China minus Chinese imports that we bring in from the U.S.A. But bilateral trade balance doesn’t necessarily determine a nation’s saving and investment. What I mean by this is that while we might have a terrible trade deficit with China, it is the country’s overall trade balance which matters most.

Most economists believe that bilateral trade deficits receive more attention than they deserve from both a macro and micro perspective.

As Robert Solow of the Solow Model once said, “I have a chronic deficit with my barber, who doesn’t buy a darned thing from me.”

But for those who are interested in this particular bilateral trade balance, one of the ways in which China manages their competitive pricing which you may not have considered is the overall lower standard of living in China which then allows firms to pay their workers lower wages.

And then there’s the value of the dollar. China is now officially America’s biggest lender, which gives them some leverage. Hypothetically speaking, if China were to dump all of its holdings, we could expect our interest rate to shoot up. Once again, though this is entirely hypothetical, the Federal Reserve could intervene. Anything could happen. On the other side of the coin, however, if it came down to economic warfare, our sanctioning of their exports would prove detrimental for them as well.

But really, I was just having a little bit of fun with the last paragraph. I don’t envision this actually taking place, at least not any time soon.

With that said, let me close by saying that our bilateral trade deficit with China in particular doesn’t represent an unsuccessful relationship. Here is some evidence of why provided by the Trade Resource Center:

• In a healthy and growing economy such as that of the United States, consumers simply have more money to buy more goods and services, including more imports. The trade deficit grows when our economy grows and shrinks when our economy shrinks.
• At its most basic level, the bilateral trade deficit reflects a difference in U.S. consumer and Chinese consumer purchasing behavior and purchasing power. For example:
  • Most imports from China are inexpensive consumer products that no longer are manufactured in significant quantities in the United States, such as low-cost apparel, footwear, radios, televisions, toys, sporting equipment and consumer electronics. These are goods that U.S. consumers desire and purchase in large quantities.
  • Most Chinese imports from the United States are expensive, high-technology goods, such as semiconductors, computer software, aircraft and transport equipment, pharmaceuticals, and medical devices and services, but China is a developing country that cannot use or afford many of the products we export. The United States does sell large quantities of these products to other countries — accounting for our bilateral surplus with many countries — and exports of these products to China are growing.
• In the first half of 2004, China had a global trade deficit. Despite its bilateral trade surplus with the United States, China is importing more than it is exporting overall.
• In the 1980s, global assembly of low-cost consumer items shifted to China from other Asian economies such as South Korea, Hong Kong and Taiwan. Growing imports from China do not displace U.S. goods; they displace imports from other Asian economies.
• U.S. consumers benefit from lower-priced imports. Increased tariffs on imports from China would result in higher costs for clothing, footwear and toys in the United States, which would weigh most heavily on working families.

What we need now is an increase in savings and investments within our country. In the short run, we’d be dealing with unemployment rates and in the long run, we’ll be closer to approaching the Golden Rule, which I’ll go into in one of my next few posts.