Why the trade arithmetic favors China

2019-06-06 15:06:50 CGTN Mo Hong'e

The biggest risks facing the world economy today stem from the escalating trade war between the United States and China. In the past few weeks, the threat has gained greater salience: as negotiations have stalled and tariffs have risen, markets around the world have registered tremors of concern. Yet most commentators fail to recognize the kind of effect an all-out clash would have on the U.S. economy, and on the world.

It is true, as U.S. President Donald Trump has repeatedly pointed out, that his country runs a large trade deficit with China. In 2018, the U.S. exported goods worth 120.3 billion U.S. dollars to China – a substantial amount, but dwarfed by the 539.5 billion U.S. dollars of goods that it imported from China. And while firing the latest salvo on May 10, when the U.S. hiked tariffs on 200 billion U.S. dollars' worth of Chinese goods from 10 percent to 25 percent, Trump threatened to impose the same rate on virtually all imports from China. In retaliation, China imposed reciprocal tariffs on 60 billion U.S. dollars' worth of U.S. exports, scheduled to take effect on June 1.

Trump's tariff policy is rooted in a fundamental misunderstanding of what bilateral trade deficits mean. Consider a simple example. I am now in Nuremberg. When the bus that brought me here stopped at a service area, I went into a store and bought snacks and coffee. Because the store bought nothing from me, I ran up a trade deficit with the store, and the store had a surplus with me. By Trump's reasoning, I would have to rush back to the store, complain about this imbalance, and insist that the store now buy an equivalent amount from me.

If every country followed that logic, we would quickly return to a world of barter, and the quality of our lives would be vastly diminished. One reason the world is prosperous today is that countries can run a deficit with one trading partner and a surplus with another.

There are many issues on which the U.S. should take a strong stand toward China, but raising tariffs should not be America's instrument of choice, especially now that China has moved largely to a market-based exchange-rate system.

Furthermore, China is now so globally connected that isolating it would be virtually impossible. The Chinese government's Belt and Road Initiative of transnational infrastructure investments, for example, now involves 126 countries and 29 international organizations.

Chinese confidence is also reflected in the ironic tone of its admonitions. As Gao Feng, spokesperson for China's Ministry of Commerce, recently said in remarks clearly directed at Trump, "If the United States wants to continue to talk, it needs to be sincere and correct its wrong practices."

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