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Trump should not use goods trade deficits as the basis of trade war

Last year, the United States launched trade and tariff battles with, among others, the European Union, Canada, Mexico, Korea, Japan and China (with whom the US had the largest deficit).   The US had basis for its dissatisfactions, but the frameworks need to evolve to newer models to achieve an improved trading system for the US and the world with lower risks. Why?

– As a measure of the flows and sustainability of the financial health of a country in the global economic system, the goods deficits have become a poor measure given that trade in services has exceeded that of goods already, and current methods are an inaccurate gauge even of the goods flows.

– The dynamics have changed from the economy of specific goods to that of ecosystems.

– Decisions are not determined by rational economics, but are skewed by cultures, political systems, media and power structures, each exerting their influences.

Why goods deficits is a poor measure: US-China example

The US net deficit with China is actually just a fraction of the $375-billion deficit in 2017 that is the basis of the US trade wars.

– The US and foreign components entering a China-exported product are not counted. For instance, the Apple 7 and 7 plus, exported at a $237-nominal value each, have input components, including $70 from US companies, $70 USD from Japanese, and the rest mostly from Korea and Taiwan.  Apple’s profit was estimated at some $280, while less than $20 is retained in China. There were $15.7 billion of exports of just the 7 series to the USA, contributing to the “US deficit with China” (study by Professors Dedrick of Syracuse and Greg Linden of University of California, Berkeley) On another top model, quoted numbers showed some less than $30 retained by China, while the margin was over $600 for Apple.

– Goods sold to China by US subsidiaries in China not counted as exports to the Asian country reached approximately $220 billion in 2017. Major portions of the sales include Nike, Apple (over $40 billion), Ford, Qualcomm, Boeing Intel, Nvidia, Starbucks and General Motors, which was a collapsed company that was saved by China business (and US Taxpayers bailout) and is now the No. 2 car company in China with 10 joint ventures.

– Cheaper goods sold to US companies both in and outside the US are often a foundation of the competitiveness and high profitability of US companies.

– Services exports are not counted — the retained value in a country of services exported is much higher, often higher than 70 percent against that of goods trades sometimes often less than 20 percent. The US has a $270-billion surplus with the world (data from thebalance.com). Chinese tourism to the US ranks bigger than soya beans, aircraft, electrical machinery and other items as the US’ biggest single export to China. The deficit also doesn’t even count services in finance, intellectual property and entertainment.  Some 330,000 Chinese students in the US spent upwards of $10 billion in 2018.

– Investments are not yet included in the calculations of goods deficit.

Council of Foreign Affairs and former US Trade representative Michael Froman points out that any economist measuring trade performance entirely on goods deficit wouldn’t pass a basic economics class.  An “aggregate economic relationship” would be a more balanced measure, proposes Louis Kuijs, head of Asia economics at Oxford Economics. The World Trade Organization recognizes the inaccuracy of a purely goods trade picture and now uses a “trade in value added” measure.

Surplus or deficit not just due to price alone

As Apple’s Tim Cook explained, beyond the cost of production, Apple manufactures in China because of the huge ecosystem of suppliers, logistic infrastructure and the millions of engineers produced each year in China, versus a fraction of that in the US or elsewhere.  The same reasons are why despite the rank and file salaries in the China coastal regions being at triple that of the Philippines, the goods manufactured are much cheaper than those from the Philippines. Tesla recently also chose to start manufacturing in China.

Effects of the trade wars

In the earlier trade wars in the mid 1980s, the US forced Germany and Japan to revalue their currency, and Japanese yen practically doubled in value. Despite that, Japan continued to have a surplus, and today both countries continue to have among the largest surpluses vs the US.
In 2018, despite the trade war, the US deficit with China still grew from $375 billion to some $410 billion because of US companies frontrunning their orders ahead of increased tariffs.  US companies made their private decisions, just as they chose to move their production overseas and became more profitable than ever over the decades, choosing China as their base.  Currently the trade wars have caused large shifts of orders to other countries for traded goods, but manufacturing supply chains will take probably some two years to select their new bases, build factories and train people in their move out of China. This direction had already been part of China’s policy to move to greater private consumption as a portion of the national economy.  Countries like Thailand and Vietnam have been big beneficiaries of these moves, to the tune of tens of billions of US dollars for Vietnam.

Will the tariff wars just end with moving the production sourcing elsewhere even as the deficits resume? To what extent are trade practices unfair, unusual on comparative terms? To what extent will technology reduce the wage advantage of new and less developed countries entering the production chain, or even reduce employment in the developed nations? How should the Filipino position?
Join us August 16 (Friday afternoon) on the special forum “How the Philippines Can Win in the US-China War / 5G / Globalization”… For details, email idsicenter@gmail.com.

New Worlds by Integrated Development Studies Institute (IDSI) aims to present frameworks based on a balance of economic theory, historical realities, ground success in real business and communities, and attempt for common good, culture and spirituality. We welcome logical feedback and possibly working together with compatible frameworks

(Read More: 2nd part of series) “What Trump can and cannot achieve in the trade war” https://www.manilatimes.net/2019/08/18/opinion/columnists/what-trump-can-and-cannot-achieve-in-the-trade-war/

**Also published in: https://www.manilatimes.net/2019/08/11/opinion/analysis/trump-should-not-use-goods-trade-deficits-as-the-basis-of-trade-war/598470/

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