04/03/2018
The China-US trade imbalance is as contentious as ever. The rhetoric and potential consequences are getting serious. On March 1, 2018, President Trump announced he would impose a 25% tariff on steel imports and a 10% tariff on aluminum. The tariff will raise the costs of imported steel, which are primarily from China. Trump's move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines. It looks like president Trump is resorting to another populist rhetoric rather than getting to the bottom of what is inherently a structural feature of globalization itself.
When trying to put a finger on the causes and remedies to the China-US current trade imbalance it would be useful to gain an understanding of what is really driving these exports, and who is actually instigating this trade imbalance. The key point I’m making is that while the China may enable this trade imbalance through an undervalued currency, among other measures, US companies also play a decisive and instigative role in this, through relocation of manufacturing and outsourcing. In addition to the U.S. companies, other actors involved are foreign invested companies (including Taiwan) and private labeled goods sourced by US companies.
First, let’s see some basic facts. The U.S. trade deficit with China was $375 billion in 2017; which exists because U.S. exports to China were only $130 billion while imports from China were $505 billion. In terms of contents, the United States imports consumer electronics, clothing and machinery from China. Of course, China can produce many consumer goods for lower costs than other countries can. Americans of course want these goods for the lowest prices. China keep prices so low because of the lower standard of living, which allows companies in China to pay lower wages to workers. Second, 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. Some other types of raw materials are those previously imported from, say, Africa to the US. But now a US company can directly shipped raw materials from Africa to China. This will be processed into intermediate stage and then export to the US. In addition to the cost factor, another reason is environmental standards. Low processing of mineral resources is generally polluting and thus banned in the US, EU or Japan.
As competition among US companies keeps hardening, the outsourcing of US manufacturing process to China continues. As a result, U.S. manufacturing jobs are lost. Naturally, to bring jobs back politicians resort to the idea of imposing tariffs or other forms of trade protectionism against China. As we can see, most US companies involved in outsourcing to China will resist the idea of imposing tariffs or protectionist measures. Also, if the US implements trade protectionism, U.S. consumers would have to pay high prices for their "Made in America" goods. More expensive “Made in America” goods may push the average price up in the US. This means higher export prices. This in turn means lower U.S. exports to China relative to the current levels. That's why it's unlikely that the trade deficit will significantly change. Again, this leave U.S. policymakers with the temptation to resort to tariffs or protectionist measure. Politically, it sells well but in reality those measures aren’t compatible with the global economies. Affecting U.S.-China bilateral trade is likely to harm some U.S. manufacturers relative to their EU counterparts as long as the latter keep outsourcing to China. Those EU competitors will likely grab those U.S. customers seeking cheaper “Made in China”. Then, U.S. policymakers have to also impose some forms of restrictions to EU products. See, president Trump has been mentioning German cars recently.
