Trade was one of the issues that got Donald Trump elected in 2016. In the campaign trail, he talked about how other countries were taking advantage of the United States. He talked straight to the American people, some who were laid off when most companies like General Motors and Ford moved their plants out of the country to Mexico and China.
As president, trade has become his rallying call. He has imposed tariffs on imported steel and aluminum. He has also placed tariffs on washing machines and other appliances. Further, he has embarked on a major trade conflict with China. This week, companies from around the country are meeting in Washington to submit their opposition to the ongoing trade war. They argue that the ultimate loser might be the US as its citizens are made to pay more for the same goods.
President Trump views trade on the basis of the trade surplus and deficit. Indeed, with the signing of past trade deals, the US has seen its deficit with countries like Mexico and European Union rise. The country has a $70 billion trade deficit with Mexico and a more than $120 billion deficit with China. It also has billions of trade deficits with the European Union. When you factor in the services in the calculation of trade, the country’s trade deficit is slightly lower.
Looking at the trade deficit is a wrong approach, especially when negotiating trade deals. For starters, a trade deficit is when a country imports more goods than it exports. The only way to narrow the trade deficit is to reduce the imports and increase exports.
Indeed, the US has a bigger trade deficit with other countries because it exports less and imports more. However, it’s much more complicated than that. Consider China for example. Most American companies are looking at China to find growth because of its improving economy and its high population. However, most American companies don’t necessarily export goods to China. They manufacture in China and sell these goods to the Chinese. Therefore, while these funds ultimately come to the United States, they are counted as surplus. In fact, American companies do trade worth more than $300 billion in China, compared to the under $25 billion that Chinese companies do in the US.
Another issue to look is the kind of work that China does. China is known as the world’s factory because of its approach to manufacturing. The country has efficient supply chains and low labor costs. Most Americans don’t want to do some of the work the Chinese does. Even with higher tariffs, it will be impossible for companies to leave China for the US.
Finally, tariffs and the retaliatory tariffs make American goods more expensive. This means that either American companies may need to move production overseas or that they may reduce the amount of trade they do with external countries.
There is a lot of evidence against tariffs. The clearest one is the ever-growing trade deficit the US has with other countries. The potentially right way to handle the situation would have to do more to export to these other countries. For example, the US may call for more expansion within the Chinese market. It may also commit to trade deals with the rest of the developed world, which may put more pressure on the Chinese to open up their economy.