…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.
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.
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).
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.
To read the rest of Gary Shilling’s May INSIGHT newsletter, click here for subscription information.
Related Articles From the munKNEE Vault:
Trump is following through on a long-time threat that he says will punish China for intellectual property infringement and create more American jobs. Effective this Friday, the Trump administration will be imposing tariffs on up to $60bn of Chinese goods, or roughly 13% of goods imported from China and 2.75% of total US goods imported according to Danske Bank.
President Trump recently announced new tariffs on imports of steel and aluminum, in a move that got mixed reviews from business and political leaders. The new tariffs would increase levies on aluminum by 10% and steel by 25%. There is much debate about the sensibility of these tariffs, but rather than wade into that morass, let’s examine what tariffs are and how they impact the economy and your investments.
Many are criticizing the Donald for imposing tariffs on some commodities such as steel and aluminum but, while he has a valid argument for his thinking, our overall trade deficit is unlikely to change. Indeed, it can not change without a serious economic depression and collapse. Let me explain why that is the case.