Page 24 - 2019 White Paper on the Business Environment in China
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9 White Paper on the Business Environment in China
The balance of imports and exports, or the trade specific countries, with the overall deficit, which reflects
balance, is part of the broader measure of the US underlying forces in the economy (McBride, The US Trade).
economy’s transactions with the rest of the world, known
as the balance of payments. The economy’s balance Peter Navarro, a senior advisor to President Trump on
of payments consists of the trade balance, or current trade and industry, believes that the deficit threatens
account, and the financial accounts, or the measures of national security in that the US depends on foreign debt
US purchase and sales of foreign assets. The financial and foreign investment to finance it. The administration
accounts include financial assets, such as stocks and has signaled that it will move aggressively to combat
bonds, as well as foreign direct investment (FDI). These practices the WTO considers unfair, such as dumping, in
accounts generally balance, since a current account which countries subsidize products, such as steel, and
deficit—the trade deficit—results in a corresponding sell them abroad for less than their market value. Just
financial account surplus as foreign capital and as surely, the US trade deficit will fall, economic growth
investment flows into the country. The fundamental will increase, and real wages will rise “from Seattle and
cause of a trade deficit is an imbalance between a Orlando to Sonoma and Milwaukee.” The national-
country’s savings and investment rates. As Harvard’s security argument that trade deficits matter begins
Martin Feldstein explains, the reason for the deficit can with this accounting identity: Any deficit in the current
be boiled down to the US as a whole spending more account caused by imbalanced trade must be offset
money than it makes, which results in a current account by a surplus in the capital account, meaning foreign
deficit. That additional spending must, by definition, investment in the US. But running large and persistent
go toward foreign goods and services. Financing that trade deficits also facilitates a pattern of wealth transfers
spending happens in the form of either borrowing from offshore. Warren Buffett refers to this as “conquest by
foreign lenders (which adds to the US national debt) purchase” and warns that foreigners will eventually
or foreign investing in US assets and businesses—the own so much of the US that Americans will wind up
capital account (Feldstein). working longer hours just to eat and to service the debt.
According to Navarro, after decades of trade deficits
Economists Gary Clyde Hufbauer and Zhiyao Yu of the and a mass migration of factories offshore, there is only
Peterson Institute for International Economics notes that one American company that can repair Navy submarine
several forces influence the size of trade deficit: propellers—and not a single company that can make
flat-panel displays for military aircraft or night-vision
• More government spending, if it leads to a larger goggles. Meanwhile, America’s steel industry is on the
federal budget deficit, reduces the national savings ropes, its aluminum industry is flat on its back, and its
rate and raises the trade deficit. A portion of the shipbuilding industry is “gathering barnacles”. The US
budget deficit is effectively financed through a rise in has begun to lose control of its food-supply chain, and
the total amount Americans borrow from abroad. foreign firms are eager to purchase large swaths of
Silicon Valley’s treasures (Navarro).
• The exchange rate of the dollar is important, as a
stronger dollar makes foreign products cheaper for Many blame China’s “massive and sustained” currency
American consumers while making US exports more manipulation from 2000 to 2010 for widening the
expensive for foreign buyers. trade deficit to historic levels. Though such aggressive
manipulation has eased since then, CFR Senior Fellow
• A growing US economy also often leads to a larger Brad Setser, a former Treasury official, writes that there
deficit, since consumers have more income to buy is still an East Asian “savings glut,” in which exceptionally
more goods from abroad (Hufbaure and Lu). high savings rates in the region, partially due to
government policy, drive large trade surpluses, which
Economists generally see these factors as more must be absorbed by deficit countries, like the US.
important than trade policy in determining the overall Setser claims that the traditional US economic agenda
deficit. That’s because making it easier or harder to trade in East Asia—aimed at liberalizing trade, investment,
with specific countries tends to simply shift the trade and exchange rates—needs to be complemented with a
deficit to other trading partners. Thus, economists warn push for the policies needed to bring East Asia’s savings
against conflating bilateral deficits, which reflect the down to a level that the region can more easily absorb
particular circumstances of trading relationships with internally. The adjustment should be centered on China,
24
The balance of imports and exports, or the trade specific countries, with the overall deficit, which reflects
balance, is part of the broader measure of the US underlying forces in the economy (McBride, The US Trade).
economy’s transactions with the rest of the world, known
as the balance of payments. The economy’s balance Peter Navarro, a senior advisor to President Trump on
of payments consists of the trade balance, or current trade and industry, believes that the deficit threatens
account, and the financial accounts, or the measures of national security in that the US depends on foreign debt
US purchase and sales of foreign assets. The financial and foreign investment to finance it. The administration
accounts include financial assets, such as stocks and has signaled that it will move aggressively to combat
bonds, as well as foreign direct investment (FDI). These practices the WTO considers unfair, such as dumping, in
accounts generally balance, since a current account which countries subsidize products, such as steel, and
deficit—the trade deficit—results in a corresponding sell them abroad for less than their market value. Just
financial account surplus as foreign capital and as surely, the US trade deficit will fall, economic growth
investment flows into the country. The fundamental will increase, and real wages will rise “from Seattle and
cause of a trade deficit is an imbalance between a Orlando to Sonoma and Milwaukee.” The national-
country’s savings and investment rates. As Harvard’s security argument that trade deficits matter begins
Martin Feldstein explains, the reason for the deficit can with this accounting identity: Any deficit in the current
be boiled down to the US as a whole spending more account caused by imbalanced trade must be offset
money than it makes, which results in a current account by a surplus in the capital account, meaning foreign
deficit. That additional spending must, by definition, investment in the US. But running large and persistent
go toward foreign goods and services. Financing that trade deficits also facilitates a pattern of wealth transfers
spending happens in the form of either borrowing from offshore. Warren Buffett refers to this as “conquest by
foreign lenders (which adds to the US national debt) purchase” and warns that foreigners will eventually
or foreign investing in US assets and businesses—the own so much of the US that Americans will wind up
capital account (Feldstein). working longer hours just to eat and to service the debt.
According to Navarro, after decades of trade deficits
Economists Gary Clyde Hufbauer and Zhiyao Yu of the and a mass migration of factories offshore, there is only
Peterson Institute for International Economics notes that one American company that can repair Navy submarine
several forces influence the size of trade deficit: propellers—and not a single company that can make
flat-panel displays for military aircraft or night-vision
• More government spending, if it leads to a larger goggles. Meanwhile, America’s steel industry is on the
federal budget deficit, reduces the national savings ropes, its aluminum industry is flat on its back, and its
rate and raises the trade deficit. A portion of the shipbuilding industry is “gathering barnacles”. The US
budget deficit is effectively financed through a rise in has begun to lose control of its food-supply chain, and
the total amount Americans borrow from abroad. foreign firms are eager to purchase large swaths of
Silicon Valley’s treasures (Navarro).
• The exchange rate of the dollar is important, as a
stronger dollar makes foreign products cheaper for Many blame China’s “massive and sustained” currency
American consumers while making US exports more manipulation from 2000 to 2010 for widening the
expensive for foreign buyers. trade deficit to historic levels. Though such aggressive
manipulation has eased since then, CFR Senior Fellow
• A growing US economy also often leads to a larger Brad Setser, a former Treasury official, writes that there
deficit, since consumers have more income to buy is still an East Asian “savings glut,” in which exceptionally
more goods from abroad (Hufbaure and Lu). high savings rates in the region, partially due to
government policy, drive large trade surpluses, which
Economists generally see these factors as more must be absorbed by deficit countries, like the US.
important than trade policy in determining the overall Setser claims that the traditional US economic agenda
deficit. That’s because making it easier or harder to trade in East Asia—aimed at liberalizing trade, investment,
with specific countries tends to simply shift the trade and exchange rates—needs to be complemented with a
deficit to other trading partners. Thus, economists warn push for the policies needed to bring East Asia’s savings
against conflating bilateral deficits, which reflect the down to a level that the region can more easily absorb
particular circumstances of trading relationships with internally. The adjustment should be centered on China,
24
