A Dose of Economic and Data Reality on Trade with China

By at 4 April, 2018, 9:52 am

by Raymond J. Keating-

Focusing on the overall trade deficit and deficits with particular countries, President Donald Trump has been emphasizing the imposition of tariffs, along with quotas, on assorted products and/or nations.

The latest action by the Administration on April 3 includes proposed tariffs on Chinese goods, which relate to intellectual property theft and unfair trade policies when it comes to the acquisition of U.S. technology. China’s Commerce Industry threatened reciprocal action against the newly proposed tariffs (adding on to Beijing’s recent action on a range of products such as pork and wine), and they made good on that threat on April 4  with a $50 billion tariff package on a variety of other U.S. goods.

(See President Trump’s FACT SHEET on “Standing Up for American Innovation”.)

In this blog post we will take a look at trade deficits, as this issue sparked President Trump’s first round of proposed tariffs on steel and aluminum. The President is also asking China for a plan to cut their annual trade deficit with the U.S. by $100 billion.

Are Trade Deficits Relevant?  

The first problem here is misunderstanding what U.S. trade deficits actually mean. Economist Dr. Richard Rahn, in a recent column for The Washington Times, nicely explained why the trade deficit basically is irrelevant:

“There is some information that the government should never publish because it is so little understood by the political class and the media. A prime example is the trade deficit number. The trade deficit is of little importance, but as we now see, a focus on that number is causing the president and others to impose destructive tariffs and other harmful trade restrictions. The trade deficit, which is officially known as the ‘current account balance,’ is merely the residual of many other policies by both the U.S. and foreign governments.”

Dr. Rahn looked at data for 13 countries, and reported that “there is no obvious relationship between a country’s trade deficit, level of prosperity, growth in GDP per capita or tariff rate.”

He clarified: “Some rich jurisdictions, like Singapore, Switzerland and Hong Kong, have zero tariffs (free trade) and run large trade surpluses. Some high-tariff countries, like Mexico, have run trade deficits, while having had low growth rates, coupled with a low per capita income. China has had a very high rate of per capita economic growth over the last 25 years, and high tariff rates, but still has a relatively low per capita income. Japan and Italy have had relatively low tariff rates, and low growth, but substantial trade surpluses. Italy and Ireland have had the same relatively low average tariff rate (both being members of the European Union), and both run trade surpluses.”

And another point that Dr. Rahn highlights must be noted: “The U.S. government has been keeping foreign trade statistics since 1790. In the majority of years, the U.S. ran a trade deficit and an offsetting capital surplus (meaning more money was invested in the U.S. than U.S. companies and individuals invested in the rest of the world). The U.S., by productively using inexpensive foreign capital, was able to create the world’s biggest and wealthiest economy.”

In fact, a growing U.S. economy is fed by investment, including from foreigners, and by expanding exports, with economic growth also reflecting and being further fed by being open to imports.

Export and Import Growth with China

Once we understand that the trade deficit is generally irrelevant, then we can focus on the trends in terms of export growth and import growth.

For example, consider that U.S. goods exports to China from 2001 (the year that China was admitted to the WTO) to 2017 grew by 579 percent.

And over the same period, U.S. imports from China – goods for consumers and capital goods or inputs for businesses, including for small businesses – grew by 394 percent. That’s strong growth – far outdistancing growth in overall U.S. trade and economic growth.

Small Business and Trade with China

In turn, growing trade with China has direct positives for the many small businesses involved in trade. For example, in terms of the role of small business and exports, it turns out that according to the latest U.S. Census Bureau data (2015): 54 percent of U.S. exporters to China had fewer than 20 workers, 69 percent fewer than 50 workers, and 78 percent fewer than 100 workers.

And regarding the role of small business and imports, it turns out that according to the latest U.S. Census Bureau data (2015): 73 percent of U.S. importers relating to China had fewer than 20 workers, 84 percent fewer than 50 workers, and 90 percent fewer than 100 workers.

Trade with China very much is about American small business.

In addition, consider that from 2001 to 2015, the number of U.S. firms exporting to China grew from 15,054 to 116,115 – a breathtaking expansion of 605 percent.

In the end, the answer to the challenges regarding certain trade issues with the Chinese government is not to impose tariffs and quotas that will only hurt U.S. consumers and small businesses. It is critical to make clear to China that its intellectual property violations only serve to undermine its own investment and economic growth.

Dr. Rahn offers sound advice regarding trade conflicts: “Finally, it is true that China and some other countries engage in destructive trade practices, and these should be dealt with directly. The goal should be to move the world toward more free trade, not to eliminate the U.S. trade deficit.”

President Trump has tweeted that we are not in a trade war with China.  Yet, this tit-for-tat on tariffs seem to be escalating. Hopefully it will subside and positive trade negotiations will ensue.  Many hard-working small business owners and their employees benefit from trade, and even “small spats” can produce casualties along the way.  These are the little guys we are looking out for and we are hoping they are not forgotten during consideration of every proposed action on trade policy.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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