As President Trump meets President Xi of China in Florida this week, the huge and mutually beneficial commercial relationship between the two countries should be a source of cooperation rather than confrontation.
President Trump and his advisors have made a big issue over America’s $347 billion bilateral deficit in goods trade with China last year, but the deficit is misunderstood and is only part of the complex commercial relationship between the world’s two largest economies.
In fact, Americans benefit in three important ways from our economic ties with China:
First, and arguably foremost, we benefit as consumers from the $463 billion in goods we imported from China last year. The clothing, shoes, electronics, furniture and household appliances we import from China make our lives better every day. They deliver lower prices for goods that loom especially large in the budgets of low-income households, allowing working class Americans to enjoy higher real incomes.
Even with the strong growth in imports from China, they have leveled off at about 3 percent of total personal income in the United States. There is nothing wrong with the fact that Americans spend 3 percent of our paychecks on products assembled by the one-fifth of mankind that lives in China.
The impact of those imports on U.S. industry has been exaggerated. Much of the rise in imports from China in the past 30 years has been at the expense of imports from other U.S. trading partners. Moreover, a significant share of the value-added materials contained in imports from China originated in other countries, such as components in iPhones and other electronics.
If those goods were not imported from China, many of them would simply be imported directly from other countries, not made in the U.S. Many of the U.S. manufacturing jobs lost to imports from China have been in less competitive industries, such as footwear and apparel, that have been in decline for decades.
Second, Americans benefit as suppliers to China’s huge and growing middle class. Last year, Americans exported $116 billion in goods to China, from soybeans to semiconductors. This was almost six times the value of what we sold to China only 15 years ago.
China is now the third-largest market in the world for U.S. goods exports. On top of that, U.S.-owned affiliate companies located in China sell another $300 billion a year in U.S.-branded goods and services to consumers in China and in other countries outside the United States.
Third, Americans benefit from China’s investment in the U.S. economy. This is the flip side of the trade deficit — an investment surplus flowing back to the United States. All those dollars the Chinese earn by selling goods in the U.S. market come back to the United States, either to buy our goods and services or to buy U.S. assets.
For China, the most attractive of U.S. assets are Treasury bonds, which offer a safe and liquid haven for China’s pool of domestic savings. The central bank of China owns about $1 trillion in U.S. T-bills, equivalent to 5 percent of the U.S. national debt.
This investment helps to keep U.S. interest rates down, reducing mortgage payments for millions of U.S. households while saving the federal government tens of billions of dollars a year in interest payments. If we make it more difficult for the Chinese to earn dollars by selling goods in our market, the result will be fewer dollars flowing back to the United States to buy our exports and Treasury bonds.
The overall U.S. trade deficit is not determined by the sum of our bilateral deficits, but by U.S. levels of savings and investment. Even if we could “fix” the deficit with China through some combination of import restrictions and export promotion, it wouldn’t change the overall deficit.
In the past five years, our petroleum deficit has dropped sharply, from $326 billion to $85 billion. Yet, our overall trade deficit has hardly budged. The dollars we spent on importing petroleum are now being spent on other imports.
In the same way, without a change in the underlying levels of savings and investment, a smaller bilateral deficit with China would simply be redistributed among our other trading partners.
If President Trump wants to put the interests of “America First,” he should seek to build on — not disrupt — our successful commercial relationship with China.