Thanks to Federal Megaspending, the Trade Deficit Has Only Gotten Worse
President Trump’s protectionist trade measures against China and other external partners have not caused a reduction of the total US trade deficit. The latter actually grew further as China’s exports found indirect ways into the US and massive domestic spending schemes were expanded during the pandemic.
Almost three years after the Trump administration unleashed the trade war on China, hostilities have not ended, but only entered a truce with the Phase One trade deal signed in January 2020. The US tariff hike on more than $360 billion of Chinese goods has remained in place until today. Washington imposed four rounds of tariffs in 2018 and 2019, with the bulk of the tariffs ranging from 10 to 25 percent coming into force in September 2018 and September 2019. Beijing has gradually retaliated with tariffs ranging from 5 to 25 percent on about $110 billion of US products. The difference in the volumes of products targeted by tariffs reflects the unbalanced bilateral trade.
The covid-19 pandemic took the trade war off the headlines, but its economic disruptions prevented China from meeting the condition of the Phase One deal to purchase an additional $200 billion of US products over the 2017 level. Recently China has approached the Biden administration trying to restart trade discussions, but it seems unlikely that Biden’s policy on China would deviate significantly from his predecessor’s. As a matter of fact, Biden’s trade agenda still underlines that “China’s coercive and unfair trade practices harm American workers, threaten our technological edge, weaken our supply chain resiliency, and undermine our national interests.” In addition, the tech war continues, as top Chinese tech companies suspected to be affiliated with the military remain blacklisted and recently the US Senate passed a bill providing $250 billion in subsides to high-tech sectors competing with China. But Trump’s protectionist agenda does not seem to have reached its target, so why continue it?
The US Trade Deficit Continued Growing
The sharp increase in US tariffs on Chinese goods led to a significant decline in the bilateral trade deficit of about 25 percent, or $108 billion, from 2018 to 2020. Despite the retrenchment of the deficit with China, the US trade deficit in goods with the world has actually increased by around $35 billion from 2018 to 2020, to a record-high $915 billion (graph 1). If Trump’s protectionist measures1 appear to have worked with China, they have certainly not reduced the overall trade deficit. The situation worsened in the first quarter of 2021, when the trade deficit widened by almost 50 percent with China and by more than one-third with the world during the same period in 2020 (US Census Bureau). At the same time, the surplus in the balance of services has shrunk by about 20 percent and it seems that the US is heading for a record-high current account deficit in 2021.
Graph 1: US Trade Deficit with China and the World, 2002–20
Source: US Census Bureau
Chinese Exports Found an Indirect Way to the US
While the US trade deficit with China was shrinking, its deficit with other Asian economies was expanding almost in lockstep. From 2018 to 2020, the US trade deficit in goods to China declined by around $108 billion, but expanded by about $90 billion with Vietnam, Taiwan, Hong Kong, Singapore, Korea, Malaysia, and Thailand. Many analysts interpreted this evolution as a readjustment of global value chains and offshoring of production from China to Vietnam, Taiwan, and other Asian peers. Yet the data points to something else. As US imports from other Asian countries grew by about $32 billion in 2019 and another $30 billion in 2020, China’s exports to the same Asian economies2 grew almost in lockstep (graph 2).
Graph 2: US Imports from and Chinese Exports to Asian Economies, 2018–20
Source: US Census Bureau and UN Comtrade Database
This would suggest that China’s production has not been relocated to other Asian economies because of the US tariff hike, but that somehow its exports have found an indirect way into the US. During the trade war, businesses were obviously eager to find loopholes to avoid exorbitant tariffs without having to shift production, in particular by using transshipment, in which Chinese exports are minimally processed during a brief stop at a third port and then reexported as a non-Chinese product. The US authorities have recognized and tried to reduce this practice, but apparently without much success. Several arguments would support this view: (i) despite a drop in Chinese exports to the US of $87 billion in 2019 and another $16 billion in 2020, China’s total exports to the world grew by $13 billion in 2019 and another $92 billion in 2020;