To: American Foreign Policy Class
From: Group 4
Date: 3/23/2019
RE: Why Can’t Trump Cut the Trade Deficit With China
Executive Summary:
China in the past few decades has emerged as the world’s largest exporter and the United States’ second-largest trading partner. Trade with China has led to the loss of American manufacturing jobs, reduced real wages for semi-skilled workers, and devastated some communities dependent on low-end manufacturing jobs. Some have estimated that China’s reform and opening up explained 25 percent of the decline in American manufacturing jobs between 1991 and 2007, and 40 percent of the loss after 2000. Through President Trump's term, he has challenged China in hopes of creating stronger American influence, while cutting back on the wide trade deficit that exists between rival nations. However, through this attempt, there have sprung major issues, which affect both the United States and China, only proving to hurt both economies in the long-run.
The inaccurate assumption to Economic Growth and why Trump is using the wrong tools to handle the Trade Deficit:
The assumption that a negative trade balance, caused whenever the United States imports more than they export, leads to a decrease in economic growth is extremely inaccurate because, in the formula used to calculate gross domestic product, the “imports are only subtracted from exports to avoid counting domestic consumption twice”. When analyzing economic growth, the two sets of economic data that often cancel each other out are current account and capital account. The current account measures the “balance of trade and investment incomes”, while capital account measures the changes that occur in long-term investment positions. According to McDaniel, President Trump “could reduce the capital account surplus, and indirectly reduce the trade deficit, by taxing new inflows of foreign investment”, which in hindsight “that would “be contrary to his goal of encouraging foreign companies to build more facilities in the United States”. The agreement Trump is currently attempting to reach with China will most likely include a major purchase of U.S. agricultural, energy, and manufactured goods. Despite its potential of helping the two-way trade deficit in the short-term, McDaniel claims that in the long-term the deficit will still increase considering the United States would continue with its low savings rate.
Explanations for China Buying Less American Goods and the Unintended Effects of Trump’s Trade War:
China has bought less US goods for a variety of reasons. In the last few years, China’s economic growth has slowed thereby reducing the demand for American-made goods. China has also retaliated after President Trump’s imposition of tariffs by lessening the buying of American goods. Trump’s tariffs are also having the effect of incentivizing American importers to buy Chinese goods quickly so the goods can arrive before potential tariff increases in the future. This buying surge is increasing the trade deficit and thus the tariffs are having the opposite effect, at least short-term than they were intended for.
The strength of the United States Dollar and Lack of Savings over Investment:
Americans have proven to be incredibly frivolous in their saving habits, especially compared to people of other nations with whom we trade. This contributes to the budget deficit in that if we saved more and spent less, it would simply decrease over time, but we do not. If we saved more, the value of the American dollar would increase, thus making our exports more expensive and closing the trade and budget deficits. Conversely, some will argue that the dollar is too strong and that a dollar of lesser value would allow exports to increase faster than imports, and thus close the deficit. Both are unique and differing perspectives on how to close the trade deficit, which many Americans feel highlights the unfairness with which many of our trade partners treat us and closing it would ensure more equitable trade deals.
Future Implications:
Going forward, the Trump Administration’s options are bleak. With nearly $200 billion worth of tariffs imposed on Chinese goods, American consumers continue to see the end of it. In an article published in the New York Times, titled ‘As Trump Moves to End Trade War With China, Business Asks: Was It Worth It?’, as tariffs are laid on the Chinese economy, they, in turn, are passed back to the American consumers through higher prices on imported goods. Both China and the United States must come to an agreement that will benefit both sides. In order to reach common ground, it is crucial for the United States to feel their interest are a priority on negotiations. Beijing has pledged to purchase hundreds of billions of dollars worth of American goods and services in hopes of narrowing the trade deficit. However, in doing so China would demand President Trump to drop all tariffs held on Chinese products. With a focus in helping the American economy, this move may act as a catalyst towards bringing both sides to a mutually fair agreement. With so much controversy over this topic finding the end is yet a possibility, only in time will the solution be found.
Works Cited
Palmer, Doug, and Adam Behsudi. "Why Can't Trump Cut the Trade Deficit with China?" POLITICO. March 06, 2019. Accessed March 23, 2019.
https://www.politico.com/story/2019/03/06/trump-china-trade-deficit-growing-1243639.
Swanson, Ana, and Jim Tankersley. "As Trump Moves to End Trade War With China, Business Asks: Was It Worth It?" The New York Times. March 05, 2019. Accessed March 23, 2019. https://www.nytimes.com/2019/03/04/us/politics/trump-china-tariffs-trade-deal.html.
This memo does a fantastic job outlining the outcomes of the tariffs the US and China have been placing on each other. The unexpected result of increased purchases of Chinese exports in an attempt to stock pile before tariffs are created completely undermining the goal of the tariffs. I think it would be interesting to look into the possible fallout between the US and other trade partners. The complex interdependence that each country has with each other means these tariffs must be effecting other countries which may damage alliances.
ReplyDeleteI think that this was a well covered topic and a well written memo. I think it is very interesting to follow where this trade war is going and to look into the impact on other nations as well as American consumers. Although I do not agree with this method of handling the issue I find it interesting to see where the Trump administration will go from here in terms of further tariffs.
ReplyDeleteOverall I was able to get a better grasp on the trade deficit between the United States and China. I was also able to understand the pros and consequences of trading with China. For example, some of the consequences being the loss of American manufacturing jobs and reduced wages. It would be interesting to see if Trump will eliminate or continue to add on tariffs on China.
ReplyDelete- Glendy Alvarez
DeleteThis was a very well written memo. It was clear that the group has a great understanding of the issues occurring with China and the US. It will be interesting to see what happens in the future with how the trade deal negotiations continue. This seemed to be very much improved from the last memo too which is good to see! Also, perfect timing given that we spent last week talking about China in class.
ReplyDeleteI think this topic is very relevant especially since Trump's term will be coming to a close next year. I think it will be interesting to see how they will adjust their tariffs imposed and how they plan to resolve the unchanged trade deficit. It would be interesting to see if they are able to remove the tariffs and how this would affect US exportation of goods. It would also be important to see if the Trump administration would propose a new plan to cover the deficit that would not involve China. Would they plan on taking on the economic giant that is Africa or should they try and resolve their issues with China first?
ReplyDeleteAs others have said, this memo was well written and detailed in terms of the pros and cons of current US-China trade relations. I agree that it is in the US' best interest to come to a mutual agreement with China as American consumers are paying the price for tariffs on Chinese imports. I agree that the US should put its interests and priorities at the forefront of negotiations with China. I also think that the US should push for greater transparency with China, so both countries can (hopefully) start to establish better relations based on trust.
ReplyDeleteI thought this was a great post, explaining economics to understand the trade deficit is a difficult task. Knowing that the deficit isn’t necessarily a bad thing is helpful for American’s to realize, including the President. Trump may be using the deficit as a way to blame the shortage of American manufacturing jobs when really his potential tariffs are causing the issues. More and more American importers are buying Chinese products before the tariffs arise, hopefully this influx of goods will also drive down prices for these goods? Beijing’s offer to buy American goods if the US were to drop the tariffs seems to be a good option for this trade war.
ReplyDeleteThis memo does a nice job explaining the deficit problem and key economic terms relevant to United States’ trade war with China. I think it is interesting to consider how this trade war impacts other countries-- especially in such a globalized world economy. Specifically, I am curious to see how the tension between the United States and China will affect South Korea and North Korea relations: How will the conflict between the US and China influence North Korea’s development of nuclear weapons? Does this offer either side some sort of bargaining power? Where does South Korea fit in?
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ReplyDeleteThe trade war with China is a very relevant and confusing issue, but the memo does well in explaining the U.S. trade deficit with China. As was discussed in class no side wins in a trade war. Therefore, I agree that it would be best for the U.S. to come to an agreement with China, as this would be beneficial for U.S. consumers. It will be interesting and worth following, therefore, to see how the Tump Administration continues to deal with this issue.
Overall I thought this was a great memo that did a nice job at explaining the complicated and layered economic relationship between the United States and China. However, trade relations between these two states have a much larger global effect, and I think your memo would benefit if a subheading addressed the worldwide implications of the trade deficit. This is imperative to realize as these two governments work towards an agreement, and it will be interesting to see how the situation develops over the remainder of the Trump presidency.
ReplyDeleteThe trade war between China and the U.S is an important topic that needs to be addressed. The issue between the two nations has begun to affect the international community. The trade war has started to change the EU, Mexico, Brazil, as well as many other Asian countries. I would have liked to see in the memo how other nations will become affected by the trade war. Overall, the memo did a great job of explaining the economic implications of the trade war and made it easy to understand. It will be interesting to see how the trade war plays out and what American allies will still support the U.S. after or if a solution is made.
ReplyDeleteThis memo does a great job of outlining and analyzing the Trade war occurring between the United States and China. It is interesting to see that both are almost at a stale-mate as of right now. Also, that the effects of the higher tariffs are going to disadvantage so many more countries than simply just China. It is incredible to see just how interdependent countries are through globalization and how the citizens of such are the one's who will truly suffer because of these nationally created actions.
ReplyDelete-Shannon
I like that this group drew upon an issue spoken about in my group's discussant and focused on more nuanced segments of the issue. I think a big thing fueling the trade war is misinformation, such as the widespread belief that China's government devalues the yuan. While there are legitimate issues that have fueled the trade war, I believe that the lies involved in this issue are the reason it has become so impactful. I think the memo would have benefited from a section focusing on China and what the trade war means for them.
ReplyDeleteYour group did a great job highlighting and explaining the effects the trade deficit has on the American economy and possible solutions that may work. I think your group could have benefitted by discussing the pros and cons of trade deficits. The concept of comparative advantage may have been something to discuss. The possible effects on removing tariffs on goods from China in the short run may be good for both economies since Beijing would buy hundreds of billions of dollars worth of American goods. However, in the long run there may still be a trade deficit, and an even larger one at that due to the lowering price of Chinese goods compared to American made ones.
ReplyDeleteOverall, I think this memo was well done on such a relevant topic in modern economics. However, I believe the group missed the recent data that has come out of the US China trade deceit reaching its highest point after the tariffs were enacted and continuing to rise as tariffs are kept in place. An increase which has largely been believed to have been strengthened by the many loopholes and workarounds in US import policies and rules. Although, I do not agree with many of the administrations economic decisions, I believe that the memo did a good job in explaining a broad overview of the trade deficit.
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