US-China Dialogue: A Good Start to Solve Trade Imbalances

maxresdefaultThe first round of the US-China Comprehensive Economic Dialogue was held in Washington DC. The U.S. Treasury Secretary Steve Mnuchin, Commerce Secretary Wilbur Ross and China’s Vice Premier Wang Yang co-hosted the dialogue.

This new dialogue was established by Presidents Xi Jinping and Donald Trump at the Mar-a-Lago April meeting in Palm Beach. Since then, the 100-day economic plan for cooperation between the world’s two largest economies has achieved results. The low-hanging fruit harvest addressed agricultural products, agricultural cooperation, financial cooperation, and infrastructure investment cooperation. In addition, China abolished restrictions on imports of American beef. The U.S. delegation in turn attended the international cooperation forum held in May in Beijing, as a signal of support for China’s “Belt and Road” initiative. (The Belt and Road Initiative is a development strategy proposed by China’s president Xi Jinping that focuses on connectivity and cooperation between Eurasian countries, including the land-based Silk Belt and the Maritime Silk Road.)

The first round of the US-China dialogue focused mostly on the bilateral trade imbalance. Any change requires efforts on both sides. From 2001 to 2016, the annual US trade deficit in goooods with China jumped from $83 billion to $347 billion, which is 46% of the total US goods trade deficit. For trade in services, the U.S. bilateral trade surplus was $37 billion in 2016. Two major structural reasons account for the growth expansion of Sino-US bilateral trade imbalances:

First, the substantial growth in imports from China is mainly due to supply chain changes in East Asia since the end of the 1990s. Due to a good infrastructure, many multinational companies moved production from other Asian countries to China. As a result, traditional trade statistics exaggerate China’s export value, all goods shipped out of China are fully counted as Chinese export even though China is only produces only a fraction of the international production chain. Using global input-output data, the OECD found that in 2011, the bilateral trade deficit between the United States and China would be reduced by 1/3 if measured by value added in China. A recent study updated the OECD data, indicated that by value added, China only accounted for 33.4% of the total US trade deficit.

With the US dollar as global reserve currency and the attractiveness of US financial markets to global investors, China experienced massive net capital outflows which leads to major net purchases of dollar assets. This led to capital inflows into the United States, partially raising the value of the dollar and increasing the US current account deficit.

Currently, the United States lacks effective measures to solve the trade imbalance problem. For example, on the issue of the transfer of civilian high-tech to China, successive administrations of the United States always seem to be more “verbal” than “action” oriented. During eight years, former President Obama never transferred civilian high-tech items to China. The former US ambassador to China, Gary Locke (known in China as Luo Jiahui) said that the United States had permitted more than 40 technology exports to China, but none of them consisted of restricted American high-tech products. Some experts estimate that if the United States would open up areas like clean energy, alternative energy saving and energy saving technology to China, the United States would ring up hundreds of billions of dollars of business opportunities, and at the same time significantly reduce the U.S. deficit with China. Perhaps one needs more optimism and courage to solve the problem. But addressed it must be!

What do you think the U.S. government should do to deal with trade deficit? Share your opinion with us!

Professor Michael Czinkota (czinkotm@georgetown.edu) teaches international marketing at Georgetown University’s McDonough School of Business in Washington D.C. and the University of Kent at Canterbury, U.K. His key book (with Ilkka Ronkainen) is International Marketing, 10th ed., CENGAGE

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