Donald Trump has openly blamed the US-China trade imbalance as the primary reason for unemployment in the US. “We have lost our jobs like we are a bunch of babies,” he said. Trump says tariffs are the best way to bring back jobs.
It is true that the US has a $375 billion trade deficit with China but does this pose a threat?
A trade deficit happens when a country buys more than the rest of the world than it sells. There are two ways how America makes up that loss, first by issuing debt such as bonds and securities. Secondly, by allowing foreign parties to buy american assets such as firms, buildings and land. But when most of the resources of a country are owned by foreign entities, that might spell trouble.
How does it work?
Since most of US imports are manufactured goods, a larger trade deficit means fewer manufacturing jobs. However, trade deficit explains only one part of the loss. Much of the rest is linked to automation and a shift into a service economy. And trade deficits do have an upside with the dollars they earn from US imports and hence foreign companies invest back into the US. Also, by buying more from them, US stimulates the economy of its trading partners which allows the US to sell them more products.
Donald Trump introduced tariffs in March while China retaliated with more tariffs and in some cases simply stopped doing business with the US entirely. The idea behind tariffs is to encourage the local manufacturers by easing the competition. While tariffs can support some inefficient industries, they can be offset by the decreased purchasing power of Americans, especially people with lower incomes who spend most of their money on consumption goods that are subject to higher tariffs.
In February 2016, Trump had accused China of perpetrating one of the “greatest theft in the history of the world.”
Is Trump right about China?
China is blocking tech giants and is forcing foreign manufacturers to share technology with its local partners. So far, the Trump administration has not taken any steps to address these concerns but instead proposed that tariffs will bring back jobs.