Explaining the US-China trade deficit

Digital Original

Featured Video Play Icon (Lisa Chiu)

CGTN’s Lisa Chiu interviewed Sara Hsu, an economist and a professor at SUNY – New Paltz about the trade deficit between the United States and China. Learn more about what the trade deficit is and why many people misunderstand it.

A trade deficit is the difference between exports and imports. And for the United States it’s often negative. It has been negative with China for about close to 20 years and it’s grown because the U.S. has consumed more goods from China than it has exported to China.

One reason for this is because U.S. firms often set up shop in China as part of foreign direct investments in China in order to produce goods using cheap labor and then to re-export them back to the United States.

It’s these companies, these multinational firms, that create a lot of profit and at the same time they generate jobs in the United States in the services sector by hiring people who do advertising or marketing or financial aspects for their companies.

In addition to that a lot of goods are simply processed in China. So that means that some goods are produced in other nations especially in East and Southeast Asia, and they’re processed or put together in China and then re-exported to the United States.

So it’s far more complex than China just producing goods and sending them over to us, and us shipping goods to them.

Now, some people have pointed to the trade deficit as something that is very bad. While others see it as something that is relatively neutral. President Trump has pointed to it as a symbol of U.S. weakness. And other China hawks have viewed it as a way in which China has attempted to exploit the United States.

Economists don’t see it that way. And the reason for that is because it makes consumption for American households far cheaper than if American firms simply produce goods in the United States, in which case they would have to pay far higher wages.

Certainly it has reduced the number of manufacturing jobs that are housed in the United States, because labor in developing countries like China or Vietnam is far cheaper than it is here.

So, China takes the dollars that we used to pay for goods imported from China and they can either hold the dollars in terms of reserves or invest the funds in the United States mainly in the form of treasury bonds. So they’re holding U.S. debt which allows America to spend more overall. So in general, it has been a positive for United States.

President Trump misunderstands and misinterprets what the trade deficit is. He seems to view it as a debt. A win or lose game, a zero sum game. When in actuality, most economists view trade as a win-win solution. Because in most cases, countries export the goods that they have a comparative advantage in, that’s relatively cheaper for them to produce, and they import goods that are relatively more expensive for them to produce.

And so in this way, both countries are thought to win out from trade. So a trade deficit is merely a measure of exports and imports. It’s not about who is winning or who is losing.