Too much attention is paid to what Trump might want to do as president — and not enough to what he (or any American president) must do.
Over the past 30 years, chronic trade deficits have given the United States a disproportionately high share of world import demand. The United States finances its trillion-dollar trade deficit each year by selling assets (mostly corporate stocks in recent years). Some might say that Trump places too much emphasis on the US trade deficit, or that his preferred solution (tariffs) may not be the best way to solve the problem. But what is unsustainable must come to an end. The United States must change its behavior, and this will have important implications for China.
The US current account deficit of $800 billion corresponds to the trade surpluses of Japan, China and Germany with the US. To be sure, China’s direct exports to the US have fallen from 8% of GDP in 2007 to just 2.3% last year (in dollar terms). Today, China exports more to the global South than to all developed countries combined, but a large part of China’s exports to the global South are dependent on those countries’ exports to the US.
The United States has the largest current account deficit among the above countries. The vertical axis is the data for 2023, in billions of US dollars .
The U.S. net foreign investment position, the difference between foreign assets owned by Americans and U.S. assets owned by foreigners, is now negative $24 trillion, compared with negative $18 trillion when Trump left office. Meanwhile, the federal debt has grown to $35 trillion, larger than the nation’s GDP. Both trends reflect the Biden administration’s failed policy of borrowing to stimulate consumption and trigger massive imports. Under Biden, the U.S. net foreign investment position has fallen at a record pace.
The historical changes of the US net foreign investment position (blue line) and the federal government debt (red line). Unit: trillion US dollars.
American consumers have long been the main provider of global demand. That is unsustainable, no matter who is in the White House. Over the past few years, the United States has financed its trade deficits primarily by selling stocks to the world. Foreign official institutions stopped buying U.S. Treasury bonds in 2012. Since 2020, most of the new federal debt has been financed by U.S. financial institutions, a potentially unstable arrangement. A decline in U.S. stocks could make U.S. assets less attractive to foreigners, and U.S. financial institutions cannot pay for a government deficit of 6% of GDP forever.
What does this mean for China?
Seasonally adjusted comparison of China’s exports to the Global South (blue line) and U.S. imports from the Global South (excluding China) (red line). Unit: million USD/month.
As mentioned above, China’s direct dependence on the US market has been greatly reduced, and China’s exports have shifted to the global South, but China’s indirect dependence on the US market is still very large. The chart shows that from 2020 to 2023, China’s exports to the global South increased from about US$60 billion per month to US$120 billion per month, an astonishing increase. But at the same time, US imports from the global South also increased from about US$40 billion per month in 2020 to about US$80 billion per month in 2023. A considerable part of China’s exports to the global South depends on the global South’s exports to the United States. The case of Vietnam reflects this to a large extent, with its exports to the United States accounting for a quarter of Vietnam’s own GDP, while the cases of Indonesia and Brazil are relatively less obvious.
The changes in the share of exports to the United States in each country’s GDP over the years. The dark blue dotted line represents Vietnam, the dark green represents Brazil, and the light blue dotted line represents Indonesia.
Everything depends on how the United States reduces its trade deficit. If Trump imposes high tariffs, as he hinted during the campaign, prices in the United States will rise and consumption will collapse. The whole point of tariffs is to raise domestic prices to stimulate domestic production. Shrinking US demand will in turn depress growth in Europe, Japan, and the global South, and China will also be affected. According to my calculations, the United States now imports most of its capital goods. If tariffs raise the price of capital goods, the negative impact on investment may exceed the benefits of higher prices to domestic manufacturers. In this case, China’s economic growth will decline no matter what measures the government takes, although domestic stimulus measures can alleviate this problem to some extent.
Is it possible to reduce the United States’ dependence on imports without slowing economic growth? In the past decade, personal consumption expenditures have contributed 84% of the growth of US GDP. The United States has experienced a consumption boom and an investment bust. In fact, the capital stock of US manufacturing equipment has not changed in real terms since 2000.
As can be seen from the figure below, over the past twenty years, U.S. retail sales and imports (both shown as deflating series) have moved in sync, with every increase in consumption corresponding to an increase in imports.
Comparison of the latest U.S. retail sales and food services (blue line, corresponding to the right vertical axis, unit: million, 1982-1984 consumer price index adjusted US dollars) and actual goods imports (green dashed line, corresponding to the left vertical axis, unit: billion, 2017 chained US dollars). Data source: Federal Reserve Bank of St. Louis; Bureau of Economic Analysis, U.S. Department of Commerce.
It is possible to shift some overseas production to the United States. Trump has repeatedly invited overseas manufacturers, including Chinese electric vehicle companies, to build factories in the United States to produce products for the American market. This is a solution to some extent, but it is very difficult to implement. The Biden administration has provided huge subsidies to semiconductor manufacturers, but the resulting factory construction boom has led to a 30% increase in the cost of new industrial plants in the United States between 2022 and 2023 due to a lack of qualified talent, equipment and infrastructure. (Trump may also insist that electric vehicles produced by Chinese companies in the United States must use American chips?)
America needs a new manufacturing culture. Once great manufacturing companies such as Boeing and Intel have failed many times, but America’s ability to adapt should not be underestimated. Tesla also produced cars in California before building a factory in Shanghai. But any recovery of American manufacturing will take time. The Federal Reserve’s industrial production index peaked at 106 in 2008 and is now only 99. America needs to rebuild its infrastructure and cultivate skilled technical personnel and a new generation of industrial entrepreneurs.
China could agree to buy more American products, such as hydrocarbons and agricultural products, as President Trump proposed in 2019. Trump has repeatedly claimed that China has “failed to live up to” its promises to buy American products. If he puts this offer on the table again, China would be wise to accept it. Whatever the cost of stockpiling American soybeans is, it will be much cheaper than the other options. But what is most likely to happen is that the United States will impose large tariffs on imports from China and other countries.
The United States still has an advantage in certain technological fields and will continue to implement export controls on semiconductor equipment and development tools in the future. American analysts are increasingly skeptical about the effectiveness of this policy, but the political atmosphere in Washington does not allow the possibility of relaxing export controls.
Like Europe and Japan, China will have to adapt to reduced US demand for its manufactured goods. The Global South, with its 7 billion people, also has a huge demand for manufactured goods, but challenges and opportunities exist. As mentioned earlier, a large part of China’s export success to the Global South comes from exports from the Global South to the United States. To realize its growth potential, the challenge facing the Global South is not only the lack of infrastructure and technology, but also poor governance and political challenges. Compared with export-led economic growth, the greater challenge facing the Global South is to cultivate an endogenous growth model.
To a considerable extent, China’s export industries have contributed to long-term productivity gains in its trading partners. Infrastructure in the telecommunications sector is a good example. According to the International Labour Organization (ILO), the so-called informal sector employs 60% of the world’s workforce. These people do not pay taxes, have little access to government services, and most do not have access to banking. Mobile broadband supports the creation of businesses, formal employment, and integration into the financial system. As in the physical sector, infrastructure in the digital sector can also make a huge contribution to improving productivity and governance. Not all investments related to the Belt and Road Initiative will bring such huge benefits, and China will have to choose its investment areas carefully in the future.
Western economists are calling on China to follow the Biden administration’s lead and boost consumption by expanding debt. This may temporarily increase output, but it is not a long-term solution. The fundamental problem is that the world’s largest economies (including China) are short of young people. Unless current demographic trends can be reversed, the only realistic solution is to increase the productivity of young people in the global South.
This article first appeared on The Observer (guancha.cn), a Chinese news and opinion website. It is republished with permission.