A China Shipping Line container ship sails out from Sydney's Botany Bay. Photo: Reuters
Photo: Reuters

President Donald Trump’s mission to eliminate the US trade deficit with the world has so far been a colossal failure, official data showed on Monday, with the gap rising to a 10-year high.

To top it off, the deficit in goods with China reached an all-time high. And despite hype for a potential trade deal with Beijing that could chip away at the bilateral trade imbalance, there is good reason to be skeptical that an agreement could significantly change the relationship.

When it comes to commodities – specifically liquefied natural gas and agricultural products – there is room for a long-term increase in exports to China. That would mean China shifting its supply chains from other trading partners and could have a material impact on the deficit. But as Brad Setser writes at the Council on Foreign Relations, it would not come close to making up the difference, and in other crucial areas, China has made it clear it is committed to importing less from the US.

“To bring the bilateral goods deficit down to zero, US goods exports would need to grow from $170 billion to somewhere north of $600 billion: a lot of export categories need to more than triple over six years (e.g. the 2024 level would need to be 4 times current exports),” Setser notes.

Unfortunately, when you take out commodities, a lot of categories are off limits. That includes autos, aircraft and semiconductors. In each of those cases, China will more likely than not gradually replace US products with domestic ones over time.

It doesn’t stop there. In areas such as high-tech medical equipment, China also has aggressive plans to replace US products. Beijing has designs on increasing the use of domestically produced devices in hospitals to 70% by 2025, according to The Financial Times.

While reports have suggested that China will make cosmetic changes to its Made in China 2025 program, observers – as well as top Chinese officials – say that they won’t make big changes to their industrial policy.

One thing that might help narrow the gap incrementally is a slowing US economy and economic stimulus in China. There is widespread agreement among economists that the trade deficit is a function of underlying economic trends – not trade policy – and the recent increase in the deficit is evidence of this. Economic tailwinds in the US, including the tax cut stimulus, helped increase US consumption and imports.

But even if China’s stimulus helps boost its purchases of US goods, a dramatic reversal of the trend seems unlikely.

Leave a comment