China Considering Dramatically Increasing Imports from U.S.
The crux of the trade war between China and the United States has been the massive trade deficit between the two countries. China has now offered to fix this problem.
The most contentious issue with trade relations between the United States and China is the trade deficit between the two countries. In 2017, the U.S. imported $506 billion worth of goods from China and only exported $130 billion worth.
This leaves a trade deficit of $375 billion, a sore point for U.S. officials who wish to see this number reduced. One of the ways that this can be addressed is through tariffs, or it at least can be attempted that way, although this provokes retaliatory measures on the other side and leads to reductions in trade overall and doesn’t necessarily help reduce trade deficits by very much.
Tariffs are also economically inefficient, as if consumers still purchase the tariffed goods, this leads to a form of taxation, and if they substitute domestic goods for them, these goods are produced less efficiently since they are not competitive price-wise otherwise.
This inefficiency adds additional costs to the price of things and this extra cost is borne by end users. Freer trade opens up doors to greater efficiency, while trade restrictions lessen efficiency.
Stock markets prefer less trade restrictions, even though the argument that shutting out foreign business to some degree to the domestic market might seem to help domestic businesses. So much is outsourced these days that the cost of doing business for U.S. companies can rise to a point that the companies do not want to see.
Resolving this problem can only be successfully accomplished by China importing more
If trade is to open up more between the U.S. and China, we therefore have to address the massive trade deficit that exists currently. There is really only two ways to achieve this, which would be the U.S. importing less Chinese goods, by way of tariffs, or the Chinese importing a lot more U.S. goods.
China stepping up and increasing their U.S. imports is the only good solution here though, the one that doesn’t restrict trade or markets and leads to expansion rather than contraction. We could even say that the ball is in the court of the Chinese here, who have the power to execute the only real way to resolve this current mess.
That’s exactly what the plan seems to be now though, and while the Chinese have shown that they are tough negotiators and often use language that is on the aggressive side, word now is that they are planning on not only helping this problem but eliminating it entirely.
$375 billion trade deficits don’t go away without adding a whole lot of new imports, but that’s exactly what China has in mind. The plan is to increase U.S. imports by a total of $1 trillion over the next six years in a move that is designed not just to reduce this trade deficit, but to eliminate it.
This is huge news of course on the U.S./China trade dispute front, and has the potential to end in if the Chinese actually follow through with the plan. By leveling the playing field, this will eliminate what has been the real sticking point in trade discussions between the two countries for many years now, ever since the U.S. started importing a lot of goods from China.
Much of the progress that the Chinese economy has enjoyed over these past years has been due to the over $500 billion a year worth of goods they send to the U.S., and now that at least some of this may be in jeopardy if the trade disputes between the countries escalates, China has really stepped up here to preserve their economic output.
Even though the numbers don’t quite add up here if the intent is to eliminate the deficit, as $1 trillion over 6 years only adds up to about $167 billion a year, well short of the current $375 billion a year difference we currently have using the 2017 data, at the very least this will reduce it in a very meaningful way.
The prospects of the Chinese spending $167 billion a year more on imports from the U.S. is even more exciting to U.S. markets and businesses than reducing the trade deficit by this much, although both are certainly welcome.
We may be seeing the light at the end of this tunnel now
In the current battle, China has stopped importing U.S. soybeans and has imposed tariffs on other goods. The deficit looks like it’s widening though, and in the first 6 months of 2018 it grew to $222.6 billion, which translates to an annualized deficit of 445.2 billion.
If the goal of the Trump administration is to reduce this, what’s currently in place does not seem to be working at all, and may be making things worse. Trade actually increased on both sides during the first half of 2018, with the majority of the increase being on the Chinese side, working out to almost $100 billion more worth exports to the U.S. per year.
Meanwhile, U.S. exports to China only grew a bit, annualizing to only about $18 billion more than in 2017. This is certainly not taking us in the direction of reducing this deficit and instead we’ve seen it increase by a lot over this time.
With the United States throwing around the idea of reducing tariffs even before this announcement was made by China, this additional good news should move things along even further toward a resolution and may even in itself resolve the problem.
It’s hard to imagine what the U.S. could want from China aside from their ramping up U.S. imports so much, and we might even want to say that if this comes to pass, the U.S. has won this war, although both sides have so much at stake that it would be more appropriate to call this a win-win.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
Topics of interest: News & updates from the Office of the Comptroller of the Currency, Forex, Bullion, Taxation & more.