By Nitin Bajaj
The potential Sino-American trade war is the talk of the town, but is that going to make America great again? Last week, US President Donald Trump announced imposing billions of dollars worth of tariffs against the Chinese imported products. In turn, the Chinese government retaliated by announcing tit-for-tat tariffs on over 1,000 US goods.
To put things in perspective, according to the U.S. Census Bureau, America had a trade deficit, in the value of goods worth $29 billion with China for the month of February 2018. In 2017, US had a total trade deficit of $375 billion with China. However, in the broader scheme of international trade, US used to have a trade surplus with China until 1985, which is the first recorded year when the foreign trade imbalance between the two countries started to shift, and eventually ballooned to the present numbers, becoming a key concern in the American political and economic circles.
A little historical perspective
The early 1980s ushered in a new trade deficit era for the US. The reasons underlying the uptick in trade deficits—not an entirely unprecedented increase for a developed country on the cusp of a new information revolution – comprised of two major categories. One was the consumption gusto in America, resulting from new wealth generated by inflated equity, and assets markets in the aftermath of a prolonged federal monetary expansion. The second, partly resulting from the first, was a series of actions, including foreign policy blunders of inconsequential wars in the Middle-East, that led to an unusually large fiscal deficit.
The trade deficit with China didn’t just appear out of thin-air. In the years following 1985, as wages grew in America, the country gradually shifted towards importing labor-intensive goods from the East “Asian Tigers” (Hong Kong, South Korea, Singapore, and Taiwan). The last three decades just saw a mere shift of the import volumes from those four countries to China—caused by China’s opening up and lower labor costs than in the “Asian Tiger” countries.
In the long-term, the intertwined international trade and economic networks are robust enough to only call infractions of this nature disruptions, rather than dislocations. Nonetheless, the escalations can be dramatic and redoubts can start crumbling sooner than expected, especially when two of the world’s mightiest economic powers have strong resolves or ample appetite for impetuous policymaking at the behest of a few.
The current US administration should learn that the Obama administration’s decision to not disrupt the trade imbalance wasn’t the absence of action. Instead, it was a sagacious policy decision to continue carrying the weight of the international economic mantle in the world—a world where America is still the leading exporter of services, innovative ideas through its thriving Silicon Valley giants and up-starts, and a behemoth of soft-power through its lucrative companies and institutions. This bankable soft-power, the sheer economic might of the country, and its status as the largest trader in the world have helped America in settling trade deals that served its interests well. As US now withdraws from its formidable position, China may very well feel the encumbrance of advocating, and thereby, leading free trade in the world.
Nitin Bajaj works as a senior economist at Ernst & Young. The views expressed are his own, and do not represent the views of any organisation.
Stay updated with all the insights.
Navigate news, 1 email day.
Subscribe to Qrius