When hearing about the trade deficit, for some people, this term might cause negative associations. However, it is not quite bad for the economy. It is also well-known that countries are limited in their resources and, as a result, in goods and services as well. This is why they tend to make contacts with neighbors and establish trade relations. Over time, the differences between the volume of a trader with each other are accumulated since they are not trading the exact same amount with each other. One country might need X amount of goods, while in exchange, the other country might need X-Y amount of goods.
The world’s biggest economies, the United States and China, had to overcome many problems and differences in order to keep their trade relations on track. The U.S. trade deficit with China in 2020 was $310.8 billion, which is noteworthy. The trade imbalance is mostly due to the fact that U.S. exports to China were just $124 billion, while imports from China totaled $435.5 billion.
Annual Trade Deficit
The annual trade deficits of the U.S. in relation to China were quite volatile for some years. The highest, $418.9 billion, was in 2018, while the trade deficit of 2020 is the lowest since 2011. The commodities that China manufactures are one of the primary reasons for the current situation. It is very well-known to everyone that China produces a lot of products and goods at a lower price, and it does not have a competitor in this regard. Buyers all over the world are very drawn to low prices. China's competitive prices for its products might be explained by two factors:
- The first one is the lower standard of living. This means that the Chinese government allows companies to pay lower wages to workers, and they are considered to be some of the lowest-paid workers in the world.
- The second important factor is an exchange rate that is partially fixed to the value of the dollar. It gives the economy more stability and liquidity. The exchange rate is very important not only for trading goods and services but also for the financial market, as it defines the trading process and losses and gains one can have. When the changes in the financial market happen and are difficult to predict, such as in the U.S.-China trade war, the abilities of even the best brokers are tested. In this case, most of them were able to calculate the possible moves. That made them realize that the process was more likely to escalate to a higher level, and they made the proper suggestions to their clients.
However, when we talk about China, which is the world’s largest economy and the world’s largest population, the GDP numbers are not as impressive as those of the United States. China has a much lower gross domestic product per capita than the U.S. To put it in numbers, the Chinese GDP per capita is $16,804, while the U.S. is $65,298.
Additionally, labor, goods and services are much cheaper in China than in the U.S., and if the U.S. government decided to encourage national production more and impose high tariffs on the goods and services, then people living in the U.S. would have to pay higher prices. People generally prefer to pay less. Therefore, the United States buys far more from China than it exports to it. The largest category of goods that are imported in the U.S. from China are generally computers, cell phones, toys, games and sporting goods. This happens in a way that the U.S. manufacturers send raw materials to China at a low cost. When the finalized goods are ready, they are imported back to the U.S. The top products that are exported to China are soybeans, industrial machines, crude oil, etc.
In order for U.S. companies to be competitive with cheaper Chinese companies, they have to find effective ways to cut costs. This is why U.S. manufacturing declined 35% between 1998 and 2010. The imbalance between the trades of these countries is visible when there is not an equal amount of trade between trading partners. For example, when one country sees that the other country is not fulfilling its trade obligations, it imposes trading tariffs or embargoes that require additional costs for the imports.
Of course, the U.S economy is affected by this deficit because the jobs and capital are moved offshore, which is quite troublesome for small business owners and consumers. It should also be mentioned that China is the country with the most U.S. Treasury bonds. When it decides to reduce the value of its own currency, it will maintain a low exchange rate against the dollar.
What Was The Reason?
A billion dollars' worth of Chinese imports were affected by the decision made by then-president Donald Trump to enact a 25% tariff on steel imports and a 10% tariff on aluminum in 2018. The deal was made in 2019 between two governments that agreed to increase certain imports and exports. Perhaps unsurprisingly, current U.S. President Joe Biden did not change the nation's policy when he entered office. He also stated that would do anything to keep the country in the leading position economically. To accomplish that, he is considering new policies that will address China’s unfair trade practices, forced-labor programs, censorship and many other significant problems, next to the use of American intellectual property and taking advantage of it.