What's Behind The U.S. Trade Deficit?

But while the total U.S. goods trade deficit with Asia has been increasing, its share of the U.S. deficit has been declining, the authors noted. In 1991, the East Asian and Pacific region (which includes China) accounted for more than 80 percent of the total U.S. goods trade deficit. That now stands at around 65 percent, despite China’s rise as the largest supplier of goods to the U.S.

“In other words, the rise of China since the late 1980s - especially after joining the WTO [World Trade Organization] in 2001 - has not increased the total share of Asia’s contribution to the U.S. trade imbalance; China simply substituted out other Asian economies by taking their positions," Wen and Reinbold wrote.

So, even though China’s share in total U.S. trade deficits increased from around 15 percent in 1991 to 45 percent around 2016, it has not increased the total share of Asia’s trade position with the U.S., they pointed out.

The rise of the U.S. dollar as an international reserve currency and a shift in comparative advantage in manufacturing are key economic changes driving the large U.S. trade deficit.

“Given this perspective, a trade war with China may not necessarily solve the U.S. trade imbalance problem," the authors said. They identified three likely outcomes from an extended trade conflict with China, none of which are likely to increase U.S. exports and reduce its trade deficits:

  1. Chinese imports becoming more expensive
  2. U.S. trade deficits shifting to other countries with similar comparative advantages in producing labor-intensive goods
  3. U.S. exports to China becoming more expensive as a result of China’s retaliation

Notes and References

1 Kehoe, Timothy J.; Ruhl, Kim J.; Steinberg, Joseph B. “Global Imbalances and Structural Change in the United States." Journal of Political Economy, April 2018, Vol. 126, No. 2, pp. 761-96.

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