Trade was the central issue of the Trump campaign during the 2016 election. Trump claims that the large trade deficit caused the loss of millions of jobs and the closing of factories in the U. S. When Trump was elected and inaugurated as the U. S. President, he immediately canceled the Trans-Pacific Partnership (TPP) and prepared to re-negotiate the North American Free Trade Agreements (NAFTA). Trump considers these trade deals to be very bad for Americans. During the campaign, Trump also threatened to impose tariffs on many imported goods from foreign countries, particularly from China which has a large trade surplus with the U. S.

Trade is a two way street, which includes both imports and exports;

Trade (Surplus or Deficit) = Exports - Imports.

There is a trade surplus if exports exceed imports. There is a trade deficit if imports exceed exports. In 2016, the total U. S. imports were $2.2 trillion while the total exports were $1.5 trillion.  So there was a trade deficit of $0.7 trillion or $700 billion. In 2016, imports from China were $463 billion while exports to China were $116 billion, which resulted in a trade deficit of $347 billion with China. Therefore half of the total U. S. trade deficit was the trade deficit with China. This is why Trump threatened to impose a 45 percent tariff on imported Chinese goods. The other half of trade deficit was with countries like Mexico, Japan, Germany, etc.

From the data on imports and exports from China, we can see that imports from China ($463 billion) were four times (or 400 percent) the exports to China ($116 billion). It is clear that imports are the main culprit of the U. S. trade deficit with China. In order to reduce the trade deficit with China, we must focus on how to reduce imports from China rather than how to increase exports to China because the latter only contributes to about 20 percent of the total trade with China. To do this, we must understand why the U. S. imports so many goods from China (and other countries). The simple fact is that average American families love to buy inexpensive products from foreign countries. If we reduce imports from China, trade deficit with China will decrease, but the total trade deficit may not decrease significantly because there are many other developing countries that also produce inexpensive goods ready to be purchased by the American families. America is now a consumer dominated economy. Consumer spending contributes to about seventy percent of the total GDP.

In addition to the trade deficit, the U. S. also has a large national debt. Trade deficit and national debt are not totally independent issues. The government receives revenue from business and income taxes. More often than not, there are tax cuts for businesses and American families. The government uses its tax revenue for spending (such as for defense, social programs, infrastructure, etc.). Ideally, to balance the annual federal budget;

Tax revenue - Tax cut = Spending.

But usually tax revenue is not enough to pay for government spending and tax cut, and the national debt continues to rise. The debt of the federal government is financed by selling treasury bonds. Many foreign countries (China, Japan, etc.) continue to buy these to finance the deficit spending by the U. S. government. A second source of financing the federal deficit is printing by the Federal Reserve Banks (the Fed), which printed a large sum of money to stimulate the economy after the financial crisis of 2008. The Fed can print a large sum of money without causing inflation because the U. S. dollar is the reserve currency for international trade.  The Fed also buys treasury bonds. The federal government receives money from these two sources and uses it for tax cuts and for other spending. Both are supposed to stimulate the economy so that it will not fall into recession. The tax cuts for the poor and middle classes are immediately spent by American families to purchase inexpensive foreign goods and everybody is happy. The catch is that the federal debt continues to go up and so does the interest payment on this debt. The federal debt was $14.2 trillion in 2016 and it is projected to increase to $24.9 trillion in 2026. The interest payment was $241 billion in 2016 and it is projected to reach $768 billion in 2026. This is the trend unless the government stops cutting taxes and deficit spending. The big question is how long we can continue to increase the national debt before it is out of control.

Where do foreign governments get the money to buy U. S. treasury bonds? It is the money that they received through trade with the U. S. Both China and Japan own a large sum of U. S. treasury bonds because both of them have trade surpluses with the U. S.

In a democratic society, it is political suicide to be against tax cuts. In a democratic society, the government cannot forbid its citizens to buy inexpensive foreign products. The merchants or businessmen/women will import inexpensive goods from foreign countries if they realize that there is demand for them and that profit can be made from importing them.

I am not saying that tax cuts are responsible for trade deficit, although they are one of the two major factors that causes national debt to rise (the other is the government spending). When American families receive tax cuts, they do not have to go to Walmart and spend it. They can simply save the tax-cut money for other purposes such as retirement, education, etc. This will of course cause the GDP to go down and may initiate a recession because consumer spending is seventy percent of the U. S. economy.  But Americans do not like to save. The average saving rate of American families is around 5.5 percent of their disposable income which is low compared to most developed countries. The saving rate spiked after the financial crisis because people were scared. It is now returning to the historical average of around 5.5 percent. The real culprit for trade deficit is American consumers who have an insatiable appetite to buy inexpensive goods from foreign countries. As long as Americans continue to buy inexpensive goods from foreign countries, the trade deficit is not likely to go down significantly.

Of course, the trade deficit can also be reduced by increasing exports. A trade war is not the answer because it will definitely reduce exports. The American manufacturers should make products that other countries want. For example, you cannot just tell the Japanese and Germans to buy American cars. They will buy American cars only if they are better and cheaper than the cars made in their own country. To sell more products to China, the U. S. should consider relaxing some of the restrictions on trade with China. Currently Washington does not allow China to buy American products such as space and weapons systems, high tech equipment, oil companies, items with potential military applications, etc. As far as the so-called "unfair trade" is concerned, there is an international organization named The World Trade Organization (WTO), which was established by the U. S. to settle trade disputes between countries.

Another barrier for increasing the exports to China is the high savings rate of Chinese consumers. The average Chinese household socks away about 30 percent of their disposable income for retirement, education, medical expenses, etc. Until the Chinese government continues to make improvements in its social and medical systems to the extent that Chinese families do not have to worry too much about their economic future, the high savings rates of Chinese families are likely to continue. The Chinese government has been trying to encourage consumption and would like to facilitate a transition from an export and investment dominated economy to a consumption oriented economy. But the transition takes time and there is not much the U. S. can do to change it although consumption as a percentage of GDP has been growing in China in the past decade. Even if consumer spending in China continues to increase, it is not likely to cause a substantial improvement in American exports to China because U. S. manufacturers do not make many of the low-end products that Chinese consumers would like to buy.

The trade deficit also depends on the currency-exchange rate. If the U. S. dollar is strong, exports will decrease. If the U. S. dollar is weak, then exports will increase. But this is a complicated issue. There are advantages and disadvantages of both a strong and a weak dollar.

The world is changing. After World War II and all through the 1950s and 1960s, the U. S. was the factory of the world, and the U. S. produced almost half of the goods in the world. There was no trade deficit at all. During the 1970s and 1980s, Japan and Germany were rising and were catching up with the U. S. as far as manufacturing is concerned. During the 1990s and the first decade of the twenty-first century, China was becoming the factory of the world. From 1970 up to now, the U. S. gradually transitioned from a manufacturing powerhouse to a consumer oriented society. The problem of national debt and trade deficit surfaced and became national issues because Americans consume much more than they produce (the opposite is true for China). The next wave of fast growing countries, in addition to China, will most likely include India, Indonesia, Vietnam, Malaysia, Brazil, etc. These countries will likely produce inexpensive products that American consumers like to buy.

Y. S. Cha

April, 2017

Darien, Illinois