Illustration: iStock
China-US trade war image: iStock

A leap in America’s trade deficit during the first quarter pushed US GDP down at a 1.4% annual rate, the Commerce Department reported April 28. The consensus forecast called for 1% growth. A massive increase in US imports knocked 3.2% off annualized GDP, reflecting America’s growing dependence on China.

There is no historic precedent for a big economy living on imports from its declared strategic rival. America’s trade deficit in goods soared to $125 billion in March, or a record $1.5 trillion annual rate. America buys goods from the rest of the world and sells paper in return. As of yearend 2021 the US net foreign investment position stood at negative $18 trillion, roughly equal to its cumulative trade deficit over the past thirty years.

China’s exports to the US in March reached a seasonally-adjusted annual rate of $675 billion. That’s an increase of about 60% from August 2019, when the Trump administration imposed tariffs on Chinese goods.

The arithmetic of America’s foreign dependence is clear from the charts. Personal consumption expenditures rose after inflation at a 2% annual rate, in line with the preceding two quarters. Production of goods was down slightly. Output of services was in line with consumption growth. Less production and more consumption mean more imports.

A surge in demand supported by government transfer payments and a shortage of domestic capacity has led to sharp price increases for durable goods. On a GDP basis, prices for durables rose at a 10% annual rate during the first quarter.

Photo: Geopolitical Monitor

US manufacturers can’t meet the demand for goods. They face a chronic shortage of labor, which may lead to a 2.1 million shortfall in manufacturing employment by 2030, according to the National Association of Manufacturers.

That leaves imports to fill the gaps, and in particular imports from China.