Trump vs. China: An economist rejects the president’s view

Arthur Benavie is professor emeritus of economics at UNC-Chapel Hill.
Arthur Benavie is professor emeritus of economics at UNC-Chapel Hill. contributed photo

At 7:59 a.m. on Aug. 5, 2018, President Trump tweeted: “Tariffs are working big time. Every country on earth wants to take wealth out of the U.S., always to our detriment. I say, as they come, Tax them.”

Mr. Trump believes that importing more goods and services than we export means we are “being ripped off.” He sees the balance of trade as a scorecard, a conviction likely the source of his oft repeated remark that “trade wars are easy to win,” implying that if we just flip that trade deficit into a surplus we wind up the “winner” and the other country the “loser.”

Economists overwhelmingly reject the president’s view. While the U.S. does have serious outstanding trade issues with China, the trade deficit is not one of them.

Why not? Because any excess of U.S. imports over exports is paid for by the U.S. borrowing from the foreign country, that is, by sending them our IOUs, such as Treasury securities and corporate stocks.

As with any borrowing, the results can be good or bad, depending on how the borrowed funds are used. Our borrowing from the international market means that foreign investors are choosing to invest in the U.S. Our economy remains an attractive destination for foreign firms, which make investments in the United States on a regular basis.

A main type of foreign investment consists of spending on new factories, real estate, infrastructure, and training the labor force. Many state and local governments eagerly pursue foreign investments as a way to increase employment and develop new industries.

Both the Obama administration and the current Commerce Secretary Wilber Ross have encouraged foreign investment, subject to national security considerations. Consider a few examples.

North Carolina has developed a flourishing partnership with foreign companies. Over the past decade more than 560 international corporations have invested over $14 billion and created almost 50,000 jobs in the Tarheel state. The leading industries are pharmaceuticals, automotive components, textiles and chemicals. The main investing countries are Germany, Japan, Canada and Denmark.

In the region surrounding Chattanooga, more than 24 companies from 20 countries have invested billions, employed thousands, and driven Tennessee’s unemployment rate to a record low. Mayor Andy Berke said, “Trade and foreign investment is a big part of Tennessee’s portfolio, and it affects many people in our area.”

To pressure China to change their trade practices, President Trump has put tariffs on billions of dollars of Chinese products and is currently threatening billions more. The existing tariffs have already led to a 90 percent drop in Chinese investment in the U.S. over the last several months. If Mr. Trump continues along this punishing path, mutually profitable trade relationships that have taken years to develop will be destroyed. Actually, a trade war, by impacting both exports and imports, will not even necessarily shrink US trade deficits!

A final irony. President Trump believes tariffs on China are punishing China. They do, but most of the punishment is not borne by China. Tariffs are based on the value of products once they reach their final destination. Typically, several nations, including American corporations, have contributed value along the way, about two thirds on the average.

For example, a large part of our trade deficit with China consists of the $70 billion worth of cellphones we import. That number does not measure the value that China created; most of that final value comes from Switzerland, South Korea, Singapore, and Japan. The value Chinese workers add, mostly by assembling the parts, represents only between 3 and 6 percent of the retail price of the phones.

The lion’s share of the damage inflicted by a cellphone tariff would fall on our trading partners and, of course, on American consumers and companies because of the higher prices.

Arthur Benavie is professor emeritus of economics at UNC-Chapel Hill.