The U.S. Would Win Out In A Potential Trade War With China – Here’s Why

…Will the trade war between the U.S. & China escalate to the level of disrupting significantly the economies of America and China—and, indeed, the world? [No, not by a long shot, as this article clearly demonstrates.]

The original article has been edited here for length (…) and clarity ([ ])

Chronic U.S. Trade Deficits

The U.S. trade deficit with China was $375 billion last year, or 62% of the total American international trade shortfall, having grown chronically and rapidly from $10.4 billion in 1990. In the first two months of this year, the U.S. trade deficit with China was $65 billion, up from $54 billion a year earlier.

trade deficit country

On the surface, 21% of Chinese exports go to the U.S. vs. 50% that are bound for Asia (Chart 2) but many of the latter products are processed in other Asian countries before being shipped to the U.S. We estimate that the American imports that originate in China are two to three times the size of those shipped directly, so about half of Chinese exports end up in the U.S.

china exports gdp

Chinese exports account for about 20% of GDP and direct exports to the U.S. total 4.3% of total economic output. In contrast, exports from the U.S. equal 12% of GDP and exports to China equaled 0.8% of GDP last year so those exports are almost twice as important to the Chinese economy as exports are to America’s. Even more so since the only other major driver of Chinese growth is infrastructure spending, which results in excess capacity, ghost cities and huge debt (Chart 4).

china total debt

Proposed Tariffs

Unfortunately, China has no other viable export markets in which to sell all those electronic gadgets, clothing and flatscreen TVs that American consumers love to buy. Also, changing spending patterns present a long-term problem for China’s export emphasis on goods. As economies develop, they become more oriented toward consumption of services and less on goods… This is true of the U.S. where just one-third of consumer spending is on goods while services have climbed to two-thirds. It’s also true of China, but at her early stage of economic development, goods, many of which are exported, still account for 41% of total output.

The proposed 25% U.S. duties on 1,333 Chinese goods…are aimed at China’s targeted industries for future growth under its “Made in China” 2025 industrial plan…The [resultant] $50 billion in planned U.S. tariffs on Chinese goods would amount to 4.3% of Chinese GDP, but China’s $46 billion retaliation is just 0.2% of U.S. GDP.

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2 comments

  1. Bernard Dozier

    It seems to me that the tariff game is another form of the old unworkable eye-for-an -eye justice system that inflicts greater and greater hurt upon both parties alternately. All that does is create remembered ill-will, which forms the basis for new cycles of inequities and hurt.

    Now, the US justifies imposition of tariffs because it claims to have been being taken advantage of by China over decades of trade. But, really? If China takes Treasuries, which are Federal IOUs, and never exercises them, then it would seen that the US takes China’s goods for free. So, who is taking advantage of who? And does anyone win at the trade war game?