Dealing with the Trade Deficit

Fighting U.S.-China trade imbalance demands long-term strategy
In September, one of the world’s most important bilateral trade relationships was on the verge of crisis. In retaliation for American support of Japanese claims to the Senkaku Islands, the People’s Republic of China launched a boycott of rare earth metals, prompting fears of a new economic conflict. While perhaps more potent in gesture than in effect, the boycott did highlight a crucial issue: American trade dependence on China.
The U.S. trade deficit with China is, in nominal terms, the largest such gap in the world. The causes of the deficit are complex, and high levels of U.S. consumption have been significantly more important than Chinese currency manipulation. The future of America’s trade deficit with China will continue to depend on long-term factors like rates of consumption and savings and the U.S. national debt.
Losing The Way
Over the past decade, America’s trade with China has tripled, and the People’s Republic has become the biggest source of U.S. imports. The only number that has grown faster than overall trade is the trade deficit. The gap between U.S. exports to and imports from China has expanded rapidly, from $84 billion in 2000 to $268 billion in 2008. While the recession has narrowed the gap slightly, renewed economic growth will likely increase the deficit again.
Such deficits matter in both the short and long term. Michael Pettis, a senior associate in the Asia Program at the Carnegie Endowment for International Peace, told the HPR, “The United States needs to bring down the trade deficit or it must face both rising debt and persistently high unemployment.” As Pettis explained, trade deficits are not necessarily harmful in and of themselves. “If the U.S. deficit was driven by high levels of investment rather than by high levels of consumption, it would be sustainable,” he said. Since the American trade deficit largely is driven by consumer spending, however, its effects may be more harmful.
The China Syndrome
The trade deficit stems from fundamental American economic deficiencies. In particular, high levels of American consumption and low savings force the country to purchase many of its goods abroad. Dwight Perkins, a professor of political economy at the Harvard Kennedy School, said that the United States will have a big trade deficit with China “as long as we have low savings rates and China has high savings rates.” Perkins continued, “Our problem is that we’re consuming more than we produce. If we have that, by both the households and by the government, you’re going to have a current account trade deficit.”
China’s artificially cheap renminbi currency may contribute to the deficit, but the importance of this factor is likely overstated. Indeed, cheap currency may harm China as much as it does the United States. As Pettis argued, “Not only is the currency seriously undervalued, but, much more importantly, interest rates are set artificially low at a rate that all but guarantees excess capacity. Not only is this not sustainable… but we have long passed the stage where there can be a relatively painless adjustment.”
Finding Solutions
While decisive action on Chinese imports may be politically appealing, temporary fixes are more likely to exacerbate the deficit than to bring relief. As former U.S. Trade Representative Charlene Barshefsky told the HPR, “Competitive devaluation of currency is not positive.” She continued, “The best route for this kind of rebalancing to occur is negotiation among the major countries affected, and a constituent but measured alternation over time, in various countries.”
While there may be no silver bullet in the short term, the United States can still prepare for the future of Chinese-American trade. Barshefsky noted that to prevent further growth in its trade deficit the United States will have to stay ahead in the development of new industries and technologies. “The United States lags behind China in developing alternative energies, and this is a significant competitive disadvantage,” said Barshefsky. “Along with being a harbinger of a future trade gap, this could jeopardize an entire industry.” America is able to export billions of dollars of goods to China today precisely because of U.S. advantages in certain high-tech industries. If the United States fails to prepare for the industries of the future, however, the current period of trade deficits may seem like a golden age in retrospect.
Jimmy Wu ’12 is a Staff Writer.