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China may be ready to buy more US goods — but economists say that isn’t what matters

February 22, 2019

Chinese President Xi Jinping and U.S. President Donald Trump.

Jim Watson | AFP | Getty Images
Chinese President Xi Jinping and U.S. President Donald Trump.

Amid an ongoing trade war between the world’s two largest economies, reports emerged that China has offered to buy more U.S. products in the coming years to reduce the two countries’ bilateral goods trade imbalance.

Such a gesture may address one of President Donald Trump’s stated goals for U.S.-China trade negotiations, but experts say it’s addressing a metric that doesn’t matter very much.

That is, a bilateral trade balance — which measures the transactions between two countries — is an indicator that doesn’t adequately reveal who’s gaining or losing in a relationship, economists and trade experts said.

The arguments for and against relying on such metrics touch on multiple factors, but a frequently repeated view is that paying for goods does not automatically make the buyer a loser.

Pushan Dutt, an economics professor at business school INSEAD, put it this way: “If I pay my Pilates instructor every month for Pilates classes, then I run a ‘bilateral trade’ deficit. But that does not mean I am losing or that my instructor is winning in this relationship. After all, I am voluntarily paying for a service that I value.”

“A bilateral trade deficit is not a justification for a trade dispute.” -Stefan Legge, lecturer at the University of St. Galle

The U.S. has had a goods trade deficit with China — meaning a deficit for tangible products, as opposed to services — for the past 33 years, according to the Census Bureau, which only shows trade data between the two countries going back that far on its website.

And that imbalance has grown in a very big way.

The imbalance between the two countries’ flow of goods has grown from $6 million for the whole of 1985 to $301.37 billion in the first nine months of 2018, according to the Census Bureau. Trump has said that disparity is a sign the U.S. is being “ripped off,” and has used that to justify additional import tariffs on Chinese products. The resulting trade war has many experts warning of a drag down global growth.

Many have pointed out that Trump focuses only on the import and exports of goods, leaving out the services trade, which accounts for a larger share of the U.S. economy. Including services, the American bilateral deficit was only $275.02 billion in the first three quarters last year, data from the Census Bureau showed.

The trade-deficits-are-bad argument

Trump and his advisors have repeatedly argued that economic growth suffers when a country has a trade deficit. That is, when the total value of imports exceeds that of exports.

When Trump was campaigning for the 2016 election, advisors Peter Navarro and Wilbur Ross wrote in a paper outlining the candidate’s plan for the economy: “The growth in any nation’s gross domestic product (GDP) — and therefore its ability to create jobs and generate additional income and tax revenues — is driven by four factors: consumption growth, the growth in government spending, investment growth, and net exports.”

“When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth,” they added. Navarro is now a White House trade advisor, while Ross is commerce secretary.

And the view that trade deficits drag down growth is not relegated to the Trump administration.


Categories: Import & Export