EnPresident Trump and President Xi held a phone call on January 15, ostensibly to discuss the security situation on the Korean peninsula, according to a White House readout. Notably though the topic of trade came up, with President Trump stating that the growing trade deficit held by America with China is “not sustainable”. President Xi meanwhile called for a new round of comprehensive economic dialogue talks “at a proper time” in a “constructive manner”, Xinhua reports.
The Trump administration’s focus on the trade deficit as a metric for the success of its relations with other countries is well known. It is certainly correct that the trade deficit has risen. While their are definitional differences between the two countries – the U.S. measure of its goods deficit is 35.7% higher than China’s – they have both reached new records in the past 12 months, Panjiva data for U.S. imports and exports and analysis of official Chinese figures shows. On China’s definition the deficit reached $278 billion in 2017, a rise of 9.5% on a year earlier, or $372 billion on the U.S. definition for merchandise only.
Source: Panjiva
The challenge for President Trump, as outlined in our 2018 Outlook, is to find areas for concrete action that (a) won’t necessarily be unpicked by Congress or the WTO while also (b) not irreparably damaging relations with China. For China’s side the answer lies in boosting U.S. exports to it – the country is keen to increase its imports of a variety of goods.
President Trump’s next opportunity to act will come from the section 301 review of China’s intellectual property rights. He may be able to implement wide-ranging tariffs on Chinese goods in response. Put in simple terms a 1% reduction in the trade deficit with China requires $2.8 billion of reduced imports annually. Yet, it will be difficult to make a material difference without harming American consumers.
At the product level the largest exports from China to the U.S. are consumer goods including apparel ($48.8 billion worth of shipments out of the top 200 export lines in the past 12 months), electronics (including PCs worth $43.6 billion and mobile phones worth $43.1 billion) and furniture ($29.5 billion). Raising the cost of those via tariffs would certainly make consumers pay for not “buying American”.
Instead the President may prefer to focus on industrial materials. Base metals including steel and aluminum (which are under review already) were worth $11.8 billion and plastics equivalent to $13.1 billion. These could have tariffs applied, and American firms would likely be able to find alternative supplies and might choose to absorb higher costs through reduced profitability.
Source: Panjiva
