China’s exports rose 28% in September from the year-earlier level, more than the analyst consensus had forecast. More important is that China’s exports to the United States have risen by 31% since January 2018, when President Trump imposed tariffs on a wide range of US imports from China. At a seasonally adjusted annual rate, the US is buying $635 billion of Chinese goods, equal to a staggering 27% of US manufacturing Gross Domestic Product.
That’s the sort of import dependency economists associate with Third World countries dependent on former colonial powers. US exports to China during the past 12 months were only 30% of China’s exports to the US.
During the same period, China’s exports to South Korea rose by 50%, to Taiwan by 60%, and to Germany by 61%, but China imports almost as much from these three countries.
Demand for Chinese goods after the pandemic disruption has strained China’s production capacity, contributing to a power shortage that is now forcing cutbacks in key industries, including computer chips.
China came out of the COVID-19 epidemic faster than any other large industrial country, and suffered less disruption to its productive capacity. That explains part of the increase of Chinese exports to the US despite a 20% tariff on about half of all goods sold to America.
The poor condition of America’s supply chains is another part of the story. Orders to US manufacturers for manufacturing equipment, for example, languish at the level of 1992, at just half the 1999 peak.
The Trump corporate tax cut of 2018 reduced incentives to invest, cutting depreciation allowances for capital equipment in order to pay for a lower basic corporate tax rate. In response, US corporations in 2019 spent more money buying back their own stock than they did on capital expenditures, for the first time since the 2008 crash.
Another problem is the shrinkage of the active labor force. The US Labor Force Participation Rate (the percentage of the working-age population employed or seeking work) dropped sharply after the COVID-19 pandemic and has not recovered.
That explains why the Trump tariffs, continued by the Biden Administration, failed to reduce American dependence on Chinese manufacturing. America had no choice but to import more Chinese goods, and consumers simply paid more for them, contributing to inflation.
The Trump and Biden Administrations paid $5.8 trillion in COVID relief, equal to roughly a quarter of US GDP, and extended unemployment benefits, in effect paying large parts of the workforce to stay at home. This had the double effect of increasing demand for goods (especially the consumer electronics that the United States imports from China) while decreasing supply.
Lack of labor has worsened some critical bottlenecks, notably including transportation. The American Trucking Associations estimate that the US is short of 60,000 truckers.
Note on Data:
The data used in this analysis are published by China’s Customs General Administration. They were seasonally adjusted with the Census X-13 algorithm, using Eviews econometrics software. China’s data for exports to the US are higher than American data for imports from China, largely due to tariff-avoidance by US importers who buy Chinese goods that first were exported to a third country.
The Chinese data are more reliable than the US data, due to the practice of tariff avoidance through indirect routing of Chinese exports. As Federal Reserve economists Hunter Clark and Anna Wong explained in a June 2021 study published on the website of the Federal Reserve Board of Governors:
The United States’ bilateral goods trade deficit with China appeared to have narrowed substantially since the escalation of the U.S.-China trade conflict in 2018, or so US trade data suggest. By contrast, the Chinese data tell a much different story: The deficit, as implied by China’s bilateral surplus, nearly reached historical highs by the end of 2020.
Historically, the discrepancy between these trade balance figures had remained fairly predictable and stable. But with the onset of the trade conflict, US-reported import values from China have fallen more sharply than the China-reported export values to the United States. Two reasons are likely responsible for this phenomenon: (1) US importers underreporting Chinese imports in order to evade US tariffs, and (2) Chinese exporters reporting higher exports due to changes in tax incentives in China.
In this note, we find that the majority of the shift in discrepancy can be explained by the first factor, with an estimated $10 billion annual loss in US tariff revenues due to underreported US imports.