Trump should increase US exports to China, not launch a trade war

Lawrence J. Lau says Trump’s new tariffs may lead to a reduction in Chinese exports to the US, but the overall US trade deficit is unlikely to fall, and there’ll be no positive impact on its GDP or employment

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Two areas of potential exports that can be huge and are relatively uncontroversial are agricultural commodities and energy. Illustration: Craig Stephens

Published: 5:15pm, 20 Mar 2018Updated: 12:58pm, 23 Mar 2018

President Donald Trump wishes to reduce the US-China trade deficit. Just how large is this deficit? The 2017 trade deficit in goods, according to official US data, was US$376 billion, compared to the official Chinese data of US$275 billion. There are many reasons for the discrepancy.

After adjustments for the difference in the valuation of exports and imports and in the treatment of re-exports through Hong Kong, the discrepancy can be reduced to between US$325 billion (Chinese data) and US$362 billion (US data). If trade in services, in which the US has a surplus, is included, the 2017 deficit is estimated to be between US$287 billion and US$323 billion.

Moreover, the service trade figures exclude royalty and licence fee payments to third-country subsidiaries and affiliates of US corporations, such as Apple and Qualcomm. These are properly revenues received by US entities but attributed to third countries such as Ireland and the Netherlands. The precise values of these payments are not publicly available, but they are substantial. Thus, the true value of the US-China trade deficit, before adjustment to a value-added basis, is probably no larger than US$250 billion a year, which is still a large figure.

Trump wishes to reduce the trade deficit by US$100 billion. He proposes to accomplish this by imposing tariffs on Chinese exports to the US. Whether this can be done in a manner consistent with the World Trade Organisation rules is not so clear, but it is unlikely to deter Trump.

Trump should increase US exports to China, not launch a trade war

Lawrence J. Lau says Trump’s new tariffs may lead to a reduction in Chinese exports to the US, but the overall US trade deficit is unlikely to fall, and there’ll be no positive impact on its GDP or employment

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