Trade Myth 2:
China is exporting hundreds of billions of dollars of goods more to the U.S. than the U.S. exports to China. This unfair trade balance, caused by “clueless” U.S. trade negotiators, is killing jobs in the U.S. (Politicians such as Bernie Sanders and Donald Trump make this argument. Trump would impose a high tariff on imports from China and then renegotiate with the Chinese to correct the imbalance.)
It is true that the U.S.’s trade in goods deficit with China in 2015 was about $366 billion. But this statistic is misleading for several reasons:
First, U.S. law attributes the origin of imported goods to the country where the last significant manufacturing or assembly took place, and this falsely inflates China’s export statistics. Apple’s I phones are a good example of this. I phones are designed in the United States and components are sourced by Apple in the United States and many other countries. However, because I phones are assembled in China, they are considered by U.S. trade law to be of Chinese origin and their entire value is included in import statistics as originating from China! Because many products like I Phone are assembled in China from components that originate in other countries, much of the export value attributed to China really comes from the United States and other “supplier” countries.
Second, the trade deficit with China cited by politicians and their supporters arguing for trade restrictions usually doesn’t take into account the United States’ large trade surplus in services with China, which was more than $45 billion in 2015. Thus, the overall trade deficit in 2015 was actually $366 billion minus $45 billion = $321 billion. Restrictions on trade with China would hurt the U.S.’s highly competitive service industries, such as computer software, motion picture and television . , consulting and other business services.
Third, Chinese investment in the U.S. as a consequence of the trade deficit is benefiting U.S. business and employment. The flip side of an overall trade deficit is a capital account surplus. (Balance of payments accounting is done using a double entry system of debits and credits.) In order to support its trade surplus the Chinese government and individual Chinese investors must make substantial investments overseas. These include large U.S. Treasury securities purchases and a variety of other investments in the United States. Therefore, the trade deficit with China largely results in an offsetting Chinese investment in the United States, leading to lower interest rates, the funding of new businesses and increased employment.