Why America’s Trade Deficit With China Is So High
The U.S. trade deficit with China was $347 billion in 2016. The trade deficit exists because U.S. exports to China were only $116 billion while imports from China were $463 billion.
The United States imports consumer electronics, clothing and machinery from China. A lot of the imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.
Causes of the Trade Deficit
China can produce many consumer goods for lower costs than other countries can. Americans of course want these goods for the lowest prices. How does China keep prices so low? Most economists agree that China’s competitive pricing is a result of two factors:
- A lower standard of living, which allows companies in China to pay lower wages to workers.
- An exchange rate that is partially fixed to the dollar.
That means many American companies can’t compete with China’s low costs. As a result, U.S. manufacturing jobs are lost. From time to time, legislators try to impose tariffs or other forms of trade protectionism against China to bring jobs back.
If the United States implemented trade protectionism, U.S. consumers would have to pay high prices for their “Made in America” goods. That’s why it’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics and clothing, even if it means other Americans lose their jobs.
How China’s Standard of Living Is Measured
China is the world’s largest economy. It also has the world’s biggest population. That means it must divide its production between almost 1.4 billion residents. A common way to measure standard of living is gross domestic product per capita. In 2016, China’s GDP per capita was $15,400.
China’s leaders are desperately trying to get the economy to grow faster to raise the country’s living standards. They remember Mao’s Cultural Revolution all too well. They know that the Chinese people won’t accept a lower standard of living forever.
How China Manages Its Currency
China sets the value of its currency, the yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to support it. In 2016, China began relaxing its peg. It wants market forces to have a greater impact on the yuan’s value. As a result, the dollar to yuan conversion has been more volatile since then. China’s influence on the dollar remains substantial.
How It Affects the U.S. Economy
China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest. As of August 2017, the U.S. debt to China was $1.2 trillion. That’s 30 percent of the total public debt owned by foreign countries. Many are concerned that this gives China political leverage over U.S. fiscal policy. They worry about what would happen if it threatened to call in its loan.
By buying Treasurys, China helped keep U.S. interest rates low. That helped fuel the U.S. housing boom, which lead to the subprime mortgage crisis. If China were to stop buying Treasurys, interest rates would rise. That could throw the United States and the world into recession. But this wouldn’t be in China’s best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying almost as many Treasurys as ever.
U.S. companies that can’t compete with cheap Chinese goods must either lower their costs or go out of business. Many businesses reduce their costs by outsourcing jobs to China or India, which adds to U.S. unemployment. Other industries have just dried up. U.S. manufacturing, as measured by the number of jobs, declined 34 percent between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace.
(Source: “Employees by Industry,” Bureau of Labor Statistics.)
What’s Being Done
President Donald Trump promised to lower the trade deficit with China. He threatens to impose duties on Chinese imports. He wants China to do more to raise its currency. He claims that China artificially undervalues it by 15 percent to 40 percent. That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People’s Bank of China to strengthen the yuan’s value against the dollar. It increased 2-3 percent annually between 2000 and 2013. U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration.
The dollar has strengthened by 25 percent since 2014. It’s taken the Chinese yuan with it. China must lower costs even more to compete with Southeast Asian companies. That’s why the PBOC tried unpegging the yuan from the dollar in 2015. The yuan immediately plummeted. That indicates that the yuan is overvalued. If the yuan were undervalued, as Trump claims, it would have risen instead.
How the U.S. Trade Deficit With China Is Part of the Balance of Payments
The Balance of Payments
- The current account is a country’s trade balance plus net income and direct payments. The trade balance is a country’s imports and exports of goods and services. The current account also measures international transfers of capital.
A current account is in balance when the country’s residents have enough to fund all purchases in the country. Residents include the people, businesses and government.
Funds include income and savings. Purchases include all consumer spending as well as business growth and government infrastructure spending.
The goal for most countries is to accumulate money by exporting more goods and services than they import. That’s called a trade surplus. It means a country will take in more earnings. A deficit occurs when a country’s government, businesses and individuals export fewer goods and services than they import. They take in less capital from foreigners than they send out.
The current account is part of a country’s balance of payments. The other two parts are the capital accounts and the financial accounts.
The Four Current Account Components
The Bureau of Economic Analysis divides the current account into four components: trade, net income, direct transfers of capital and asset income.
1. Trade: Trade in goods and services is the largest component of the current account.
Therefore, a trade deficit is enough to create a current account deficit. That’s because a deficit in goods in services is usually large enough to offset any surplus in net income, direct transfers and asset income.
2. Net Income: This is income received by the country’s residents minus income paid to foreigners.
The country’s residents receive income from two sources. The first is earned on foreign assets owned by a nation’s residents and businesses. That includes interest and dividends earned on investments held overseas. The second source is income earned by a country’s residents who work overseas.
Income paid to foreigners is similar. The first category is interest and dividend payments to foreigners who own assets in the country. The second is wages paid to foreigners who work in the country.
If the income received by a country’s individuals, businesses and government from foreigners is more than the income paid out, then net income is positive. If it is less, then it contributes to a deficit.
3. Direct Transfers: This includes remittances from workers to their home country. For example, Mexico receives $25 billion from abroad. Although there are no exact figures, it’s probable that the majority is from immigrants living in the United States. President Trump threatened to stop those payments if Mexico did not pay for the border wall he wants to build. He would use the Patriot Act to confiscate Western Union payments. That would reduce 1 percent of Mexico’s economic output. But it would double its current account deficit of $29 billion.
Direct transfers also include a government’s direct foreign aid. For example, the United States spends $22 billion a year on foreign aid. That adds to America’s $502 billion current account deficit, the largest in the world.
A third direct transfer is foreign direct investments. That’s when a country’s residents or businesses invest in ventures overseas. To count as FDI, it has to be more than 10 percent of the foreign company’s capital.
The fourth direct transfer is bank loans to foreigners.
4. Asset Income: This is composed of increases or decreases in assets like bank deposits, central bank and government reserves, securities and real estate. For example, if a country’s assets do well, asset income will be high. U.S. assets owned by foreigners are subtracted from asset income. These include:
- A country’s liabilities to foreigners such as deposits of foreign residents at the country’s banks.
- Loans made by foreign banks abroad to domestic banks.
- Foreign private purchases of a country’s government bonds, such as U.S. Treasury securities.
- Sales of the securities, such as stocks and bonds, made by a nation’s businesses to foreigners.
- Foreign direct investment, such as reinvested earnings, equities and debt.
- Other debts owed to foreigners.
- Assets, like those described, held by foreign governments.
- Net shipments of the country’s currency to foreign governments.
Again, the opposite will add to asset income and subtract from the deficit. More specifically, this includes:
- Deposits at foreign banks.
- Bank loans to foreigners.
- Sales of foreign-based securities.
- Direct investment made in foreign countries.
- Debts owed to a country’s residents and businesses by foreigners.
- Foreign assets owned by a country’s government.
- A country’s official reserve assets of foreign currency. (Source: “Current Account,” Bureau of Economic Analysis.)
A current account deficit is when a country imports more goods, services and capital than it exports. The current account measures trade plus transfers of capital. The Bureau of Economic Analysis counts specifies three types. First is international income. Second are direct transfers of capital. The third is investment income made on assets.
A current account deficit is created when a country relies on foreigners for the capital to invest and spend.
Depending on why the country is running the deficit, it could be a positive sign of growth. It could also be a negative sign that the country is a credit risk.
The largest component of a current account deficit is the trade deficit. That’s when the country imports more goods and services than it exports. Find out the Current U.S. Trade Deficit.
The second largest component is a deficit in net income. That’s when foreign investment income exceeds the savings of the country’s residents. This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding. That causes widespread panic.
Net income is measured by the following four things.
- Payments made to foreigners in the form of dividends of domestic stocks.
- Interest payments on bonds.
- Wages paid to foreigners working in the country.
- Direct transfers, mostly money foreign residents send back to their home countries. It also includes government grants to foreigners. This component is the smallest, but the most hotly contested. (Source: “Current Account,” Bureau of Economic Analysis.)
Countries with current account deficits are big spenders that foreign investors consider credit worthy.
These countries’ businesses can’t borrow from their own residents. They simply haven’t saved enough in local banks. Businesses in a country like this can’t expand unless they borrow from foreigners. That’s where the credit-worthiness comes into the picture. If a country has a lot of spendthrifts, it won’t find any other country to lend to it unless it is very wealthy and looks like it will pay back the loans.
Why would another country lend to such a spender, even if it is credit-worthy? The lender country also exports a lot of goods and even some services to the borrower. The lender country benefits. It can manufacture more goods, thus giving more jobs its people.
In the short-run, a current account deficit is helpful to the debtor nation. Foreigners are willing to pump capital into it. That drives economic growth beyond what then country could manage on its own.
But in the long run, a current account deficit saps economic vitality. Foreign investors question whether economic growth will provide enough return on their investment. Demand weakens for the country’s assets, including the country’s government bonds.
As foreign investors withdraw funds, bond yields rise. The national currency loses value relative to other currencies.
That lowers the value of the assets in the foreign investors’ strengthening currency. It further depresses investor demand for the country’s assets. This lead to a tipping point where investors will dump the assets at any price.
The only saving grace is that the country’s holdings of foreign assets are denominated in foreign currency. As the value of its currency declines, the value of the foreign assets rise. That further reduces the current account deficit.
In addition, a lower currency value increases exports as they become more competitively priced. The demand for imports falls once prices rise as inflation sets in. These trends stabilize any current account deficit.
Regardless of whether the current account deficit unwound via a disastrous currency crash or a slow, controlled decline, the consequences would be the same.
That’s a lower standard of living for the country’s residents.
How to Correct a Current Account Deficit
A country with a current account deficit should invest the foreign capital wisely. It should build roads and ports, and educate its workforce, to boost international trade.
The country’s leaders should create current account surplus as soon as possible. This means they should improve domestic productivity and the competitiveness of its local businesses. It should also seek to reduce imports of basic necessities, such as oil and food, by boosting that ability at home.
The financial account is a measurement of increases or decreases in international ownership of assets. The owners can be individuals, businesses, the government or its central bank. The assets include direct investments, securities like stocks and bonds and commodities like gold and hard currency.
The financial account is part of a country’s balance of payments. The other two parts are the capital account and the currentaccount.
The capital account measures financial transactions that don’t affect income, production or savings. Examples include international transfers of drilling rights, trademarks and copyrights. The current account measures international trade of goods and services plus net income and transfer payments.
The financial account has two main subaccounts. The first is domestic ownership of foreign assets. If this increases, it adds to the financial account. The second subaccount is foreign ownership of domestic assets. If this increases, it subtracts from a country’s financial account.
The financial account reports on the change in total international assets held. You can find out if the amount of assets held increased or decreased. It does not tell you how much in total assets is currently being held.
The U.S. current account deficit is $469 billion as of 2016. This shows how much more American citizens, businesses and government are borrowing from their foreign counterparts than they’re lending.
Although $469 billion is lower than the record in 2006, it’s still the largest in the world. The next largest deficit is the United Kingdom, at $157 billion. The two largest economies in the world, China and the European Union, both have surpluses near $300 billion. (Source: “Current Account Balance World Rank,” CIA World Factbook.)
The U.S. trade deficit of $502 billion was the main cause of the current account deficit. The deficit is improving as the United States produces more of its own oil, thanks to shale oil found in Montana and Texas. (Source: “U.S. International Transactions,” Bureau of Economic Analysis.)
Why would the richest country on earth need to borrow money to sustain its economy? It’s because of the trade deficit. Americans spend more on imports than U.S. businesses export.
The United States is able to borrow enough to pay for its trade deficit because of the demand for U.S. Treasury notes. The federal government guarantees U.S. Treasury notes, so investors consider them the safest investment in the world.
The following seven factors contributed to the U.S. deficit’s size by driving investors to Treasurys.
- The global stock market crashes in 2000 and 2008 sent investors fleeing from stocks.
- To recover from the subsequent recessions, governments lowered prime lending rates. That created an excess of cash looking for a safe investment.
- In the late 1990s, Argentina and other Latin American countries defaulted on their loans.
- In the late 1980s, the South East Asian emerging markets crashed. It’s taken this long for money to return.
- In the late 1980s, Japan’s housing market collapsed. That brought down the country’s economy.
- The Bank of Japan stimulated the economy by printing yen. Japanese companies expanded, sending exports into the U.S. market. They exchanged the dollars they received for local currency. The BOJ used these dollars to buy Treasury notes, becoming one of its largest holders. That also increased the strength of the dollar and depressed the value of Japanese yen.
- China did the same thing. For more, see What Is the U.S. Debt to China?
Threat to the Global Economy
Many experts around the world think the U.S. current account deficit is the greatest threat to global prosperity. Congress first became concerned when the deficit hit a record $803 billion in 2006. That was a dramatic increase from $120 billion in 1996.
Congress was concerned because no country ever had a budget deficit that large. Most experts agreed it was unsustainable. (Source: “U.S. International Transactions in 2006,” Bureau of Economic Analysis, April 2007.)
The Congressional Budget Office reported that between 1997 and 2005, America’s current account deficit rose from 1.7 percent to 6.1 percent of gross domestic product. In other words, America borrowed 6.1 percent of its total output in 2005 to pay for imports.
Most of it was held in U.S. Treasury bonds. Between 2003 and 2006, foreign holdings rose 50 percent, from $1.45 trillion to $2.13 trillion. Foreigners owned more than 40 percent of Treasury debt held by the public. For more details, see Who Owns the U.S. Debt?
In 2005, foreign investors also owned $13.6 trillion in U.S. assets, such as stocks and real property. That was 109 percent of total GDP. If foreign investors called in their loans and sold all their assets, it would take more than a year for the U.S. economy to generate enough revenue to buy it all back.
Americans also owned foreign assets, which could be sold. But it wasn’t enough. Even after selling all foreign assets, the United States would still owe 20 percent of its annual production.
The sheer size of the deficit raised concerns about whether the U.S. economy could pay a decent return to investors. No one knows what this tipping point could be, because no country with an economy this large has ever run a deficit this large. If foreign investors panicked and started selling U.S. assets at any price, it could cause the dollar’s value to collapse. That would create a global economic crisis. (Source: “The Global Savings Glut and the U.S. Current Account Deficit,” Federal Reserve, April 14, 2005.)
During the recession, the current account deficit disappeared as trade and financing dried up. But the factors that caused the deficit remained. These include high consumer debt, the U.S. federal budget deficit and debt and high savings rates in Japan and China. If not addressed, these factors will limit U.S. economic growth.
How to Reduce the Threat
In 2007, the CBO reported two options to the Budget Committee of the House of Representatives. The first was to increase personal savings without tax incentives. A higher domestic savings rate would supply the necessary capital without borrowing overseas. A good way to increase the personal savings rate would be automatic payroll deductions for 401(k) plans. Studies show that people are more than willing to save if they don’t have to make the decision. If they have to opt out of payroll deductions, they tend not to do it.
The CBO also asked Congress to thoroughly review options that constrain health care costs. That’s one of the largest components of government spending. Reducing that would lower the budget deficit. That is the same as increasing the national savings rate.
The CBO warned that its suggestions options would reduce personal consumption. That’s what drives almost 70 percent of GDP growth. A higher savings rate would lead to a lower U.S. standard of living. Most politicians would not be in favor of the changes because of the threat of not getting reelected.
But the CBO said this was preferable to a drawn-out dollar decline and the risk of a sudden dollar collapse. (Source: “Testimony on Foreign Holdings of U.S. Government Securities and the U.S. Current Account,” Congressional Budget Office, June 26, 2007.)
Why Some Aren’t Worried
Despite the above arguments, many experts state that the sheer size and importance of the U.S. economy will prevent any disastrous crash. All lender countries would work diligently to keep the U.S. economy afloat. They know that if the U.S. ship goes down, all their ships will, too.
They realize that, at some point, other countries will stop lending the United States money to buy their goods. But they expect the process to be stable and with little negative impact.
The rising U.S. current account deficit is slowly making other investments more attractive. That’s occurring at the same time five other factors are in play.
- The global stock market is becoming more transparent.
- Latin American and South East Asian countries have become more open to investment.
- Japan’s economy is slowly growing. Some even say Japan’s earthquake could eventually spur economic growth.
- Many central banks did not drop rates as low as the U.S Fed did. That makes their own countries’ bonds look more attractive.
- U.S. Senators put pressure on China to raise its currency to allow the United States to become more competitive. The higher China allows its currency to rise, the less Treasury notes it needs.
But the CBO has the last word. It warned that even a gradual decline in the dollar value would lead to a lower U.S. standard of living. It would drive up interest rates and create inflation from higher-priced imports.
The United States exported $2.21 trillion in goods and services in 2016. That generated 12 percent of U.S. total economic output as measured by gross domestic product. For more, see Components of GDP. (Source: “U.S. International Trade in Goods and Services,” U.S. Department of Commerce.)
America has the potential to export much more. That’s because only 1 percent of U.S. businesses export. As a result, the United States is the world’s third largest exporter.
It falls behind China and the European Union, and barely edges out Germany. (Source: “Exports Rank Order,” CIA World Factbook.)
Top U.S. Exports
Like most countries, the United States exports more goods than services. That’s because most people prefer using local services, with people they know and trust.
Goods are a different story. People can look, feel and easily compare the value of both local and foreign goods. As a result, goods ($1.46 trillion) make up two-thirds of U.S. exports.
Capital goods are the most successful export category. That’s because U.S.-based corporations understand the needs of other multinational firms. Of the $519 billion in capital goods exported, 64 percent is from six categories.
- Commercial aircraft ($121 billion), produced by Boeing and Lockheed-Martin.
- Industrial machines ($51 billion), employing 1.3 million Americans.
- Semiconductors ($44 billion), primarily Intel and Qualcomm.
- Electric apparatus ($42 billion), mostly GE.
- Telecommunications ($41 billion).
- Medical equipment ($35 billion). Unlike most other export leaders, more than 80 percent of U.S. medical device companies are small businesses.
Next is industrial supplies and equipment. The United States exports $398 billion of materials used by manufacturers.
Most of it is oil and oil-based products. Here again, the large multi-nationals do most of the trade. They are already familiar with the reputations, leaders and processes of their main suppliers. The oil-based exports include these four categories.
- Chemicals ($71 billion). This segment is strong thanks to U.S. patent protection. One out of five patents are chemistry-related. Most of them are by-products of oil.
- Fuel oil ($30 billion). This is oil burned for fuel that’s heavier than gasoline.
- Petroleum products ($51 billion). Exxon-Mobil, Chevron and Conoco-Phillips are America’s largest producers of oil.
- Plastic ($32 billion). This is a by-product of oil. The industry employs 900,000 workers.
The next largest industrial supplies category is not oil-based, although it is a commodity. This is non-monetary gold, at $20 billion.
Consumer goods make up 13 percent of U.S. exports, at $194 billion. This is mostly pharmaceuticals ($53 billion), cell phones ($24 billion) and gem diamonds ($21 billion). Here’s more on Consumer Spending.
Automobiles are next, at 10 percent ($150 billion) of all goods exported. The Big Three U.S. automakers were GM, Ford and Chrysler until the 2008 financial crisis.
See more in Auto Bailout.
Agricultural products are a strategic export, at $131 billion. Agribusinesses receive U.S. government subsidies. That makes them lower-priced than foreign competitors. As a result, this category gets a big advantage from any trade agreements that get passed. The biggest agricultural exports are enhanced through bio-engineering and chemical additives. Both lower the cost of production. They are:
- Soybeans ($24 billion), which are mainly used for feed and are genetically engineered.
- Meat and poultry ($17 billion), which are raised using antibiotics.
- Corn ($11 billion), which is also genetically engineered.
(Source: “Exhibit 7. Exports of Goods by End-Use Category,” U.S. Census, 2016.)
Services contribute another third of total exports, at $750 billion. The services America exports the most are those that support the major goods categories.
For example, the qualities that help U.S. companies to excel in commercial aircraft also help travel companies. That’s the largest service export, at $293 billion. Next is computer and other business services at $178 billion. Protection of intellectual property, royalties and license fees is $120 billion. Banking and other financial services export $113 billion in services. Government contracts, including defense, are $20 billion. (Source: “Exhibit 3. U.S. Exports of Services by Major Category,” U.S. Census, 2016.)
Why Doesn’t the United States Export More?
The United States imports more than it exports. Why can’t it export more?
First, China, India and other emerging market countries have lower standards of living. That allows them to make consumer goods cheaper than U.S. workers can. In other words, they are better at producing some of the things U.S. consumers need than American companies are. They have the comparative advantage.
Second, some European and Japanese companies make better-quality automobiles than the U.S companies. Enough Americans prefer foreign cars to make Hondas, Toyotas and BMWs popular imports. Similarly, some foods are specialized to foreign countries: French croissants and wines, Mexican tequila and Greek feta cheese.
Third, the U.S. economy depends on oil. While oil is one of America’s largest exports, it’s also its biggest import. That’s because Americans still use more oil than the country can produce. But that has shifted thanks to shale oil production in Montana and Texas. For more, see Shale Oil Boom and Bust.
Why doesn’t the United States just use all its domestic oil, and cut imports? Geography is one reason. It’s easier to export Montana oil to towns across the border in Canada than to ship it to Florida, for example. Also, some grades of oil are not high enough for U.S. consumption, and so they’re shipped to other countries that can use them.
The United States imported $2.69 trillion in 2016. That includes $2.2 trillion in goods and $502 billion in services.
America is the world’s second-largest importer. The European Union imports more, at $2.24 trillion. China is third, importing $1.4 trillion. Combined, these countries import $5.8 trillion, or one-third of the world’s total imports of $15.34 trillion. They’re the world’s best customers.
What Does America Import?
The largest U.S. import category is capital goods at $590 billion. Businesses import $123 billion in telecommunications and semiconductors. They also import $114 billion in computers and related equipment.
Consumer goods is almost as large, at $584 billion. Most of this is cell phones and TVs ($121 billion). Next is apparel and footwear ($114 billion) and pharmaceutical preparations ($112 billion).
U.S. manufacturers import $444 billion of industrial supplies. Of this, $144 billion is oil and petroleum products. The United States also imports $350 billion worth of automobiles and $130 billion in food.
Services is a large and growing category. In 2016, U.S. service imports totaled $502 billion. Almost half was travel and transportation services, at $219 billion. The next was computer services and other business services, at $139 billion.
Finance and insurance services were $73 billion. Government services was $21 billion. (Source: “U.S. International Trade in Goods and Services,” Exhibit 8. Exports. U.S. Commerce Department.)
More than half of U.S. imports come from five countries: China, Canada, Mexico, Japan and Germany. For specifics,
Imports and the Trade Deficit
The United States imports more than it exports. That’s despite being the third-largest exporter in the world. The biggest exporters are the European Union and China. That creates a U.S. Trade Deficit of $502 billion. Even though America exports billions in oil, consumer goods and automotive products, it imports even more of those same categories. For more, see Components of U.S. Imports and Exports
Do Imports Cost U.S. Jobs?
Everything that is imported is obviously not made in the U.S.A. For that reason, it creates U.S. unemployment.
The biggest change occurred with the growth of imports from China. In 2007, 28 percent of all imports were from China and other low-income countries. This was a dramatic rise from 2000, when this value was only 15 percent.
At the same time, the United States was losing manufacturing jobs. A study found that in 2000, more than 10 percent of the labor force worked in manufacturing. By 2007, it had dropped to 8.7 percent. Not all of these losses were from outsourcing. Some were from the rise in robotics. (Source: “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review, 2013.)
The study also found that job losses hit some communities harder than others. The cities and towns that lost out to Chinese competition also experienced higher costs for unemployment compensation, disability payments, health care and early retirement. A study by Illinois Wesleyan University showed that $1 billion in imports from China reduced U.S. manufacturing by 0.48 percent.
At the same time, imports do create U.S. jobs in transportation, distribution and marketing. For example, the Heritage Foundation estimated that imports from China created 500,000 of these jobs. But it’s unlikely that these job gains offset the job losses in manufacturing. (Source: “Trade Freedom: How Imports Create U.S. Jobs,” The Heritage Foundation, September 12, 2012.)
Why Can’t We Make It at Home?
Although America CAN produce all it needs, China, Mexico and other emerging market countries can produce it for less.
Their cost of living is lower, which allows them to pay their workers less. That makes them better at producing what U.S. consumers want than American companies are. This is called the theory of comparative advantage.
For example, Indian technology companies can pay their workers just $7,000 a year, much lower than the U.S. minimum wage. In other words, there’s trade-off between plentiful U.S. jobs and low-cost products.
Many people say we should only buy items that are “Made in America.” That would solve the problem only if everyone were willing to pay higher prices.
President Trump wants to force Americans to make this trade-off. He threatens China and Mexico with higher tariffs on their imports. He has pulled the United States out of the Trans-Pacific Partnership and threatens to do the same with the North American Free Trade Agreement. That will create more U.S. manufacturing jobs while raising the prices of most imports. Those higher costs may in turn put many U.S. companies out of business. Find out What Happens If Trump Dumps NAFTA.
Most of the trading partners that the United States has deficits with fall into the first two categories. The two largest are China and Japan. Some of the largest deficits are with countries in the last category.
They include Canada, Mexico and Germany.
That’s why the countries with which the United States has the largest trade deficits in goods are not always its most important trading partners. Some nations export a lot without importing much. But the top five trading partners also have the largest deficits. Please note that the Census provides trade data by country for goods only, not services.
- China — $579 billion traded with a $347 billion deficit.
- Canada — $545 billion traded with a $11 billion deficit.
- Mexico — $525 billion traded with a $63 billion deficit.
- Japan — $196 billion traded with a $69 billion deficit.
- Germany — $164 billion traded with a $65 billion deficit.
The Largest Deficit Is With China
More than 40 percent of the U.S. trade deficit in goods was with China. The $347 billion deficit with China was created by $462 billion in imports. It was primarily consumer electronics, clothing and machinery. America only exported $116 billion in goods to China. (Source: “U.S. Trade in Goods With China,” U.S. Census.)
Note that many of the imports are sold by American companies that ship raw materials to be assembled cheaply in China. They are counted as imports even though they create income and profit for these U.S. companies.
Nevertheless, this practice does outsource jobs. For more, see U.S. Trade Deficit With China.
Japan Is Next
The second largest trade deficit is $69 billion with Japan. The world’s fifth largest economy needs the agricultural products, industrial supplies, aircraft and pharmaceutical products that the U.S. makes. Exports totaled $63 billion in 2016. Imports were higher, at $132 billion. Much of this was automobiles, with industrial supplies and equipment making up another large portion. Trade has improved since the 2011 earthquake, which slowed trade and made auto parts difficult to manufacture for several months. (Source: “Trade Balance with Mexico,” U.S. Exports to Mexico,” U.S. Census.)
Germany Is Third
The U.S. trade deficit with Germany is $65 billion. The United States exports $49 billion, a large portion of which is automobiles, aircraft and pharmaceuticals.
It imports $114 billion in similar goods: automotive vehicles and parts, industrial machinery and medicine. (Source: “U.S. Trade Deficit With Germany,” “U.S. Exports to Germany,” “U.S. Imports from Germany,” U.S. Census.)
The U.S. Has a Deficit With Its NAFTA Partners
Canada, the United States and Mexico are partners in the world’s largest trade agreement, NAFTA. The trade deficit with Canada is $11 billion. That’s only 2 percent of the total Canadian trade of $545 billion. The United States exports $267 billion to Canada, more than it does to any other country. It imports $278 billion. By far, the largest export is automobiles and parts. Other large categories include petroleum products and industrial machinery and equipment. The largest import is crude oil and gas from Canada’s abundant shale oil fields. (Source: “Trade With Canada,” “U.S. Exports to Canada,” “U.S. Imports from Canada,” U.S. Census.)
The trade deficit with Mexico is $63 billion. Exports are $231 billion, made up primarily of auto parts and petroleum products. Imports are $294 billion, with cars, trucks and auto parts being the largest components. (Source: “U.S. Trade With Mexico,” “U.S. Exports to Mexico,” “U.S. Imports from Mexico,” U.S. Census.)
Source : www.thebalance.com