Remember when our trade deficit with China mattered?
Half-year figures for Sino-American goods trade were published Friday, but
you’re in good company if you missed it. It’s hard for the bilateral trade
deficit to affect the US economy. It’s therefore even harder for tariffs on
Chinese goods to do so, despite parts of business insisting they’re awful and
parts of labor insisting they’re vital. The bilateral deficit does matter, but
not the way most people think.

Our goods
trade deficit with China rose 21 percent from the first half of 2020
to the first half of 2021, past $158 billion. Heading back before the pandemic,
it’s five percent smaller than the first half of 2019. For the year, the 2021
goods trade deficit is on course to roughly match 2014, which candidate Donald
Trump attacked in 2015 as costing millions of jobs, echoing long-standing
claims by organized labor.

In June 2014, unemployment was 6.1 percent, versus 5.9 percent this June. That seems to fit?
But the 2020 bilateral deficit was lowest since 2011, yet unemployment ended
the year higher than at any time since 2013. The bilateral deficit also plunged
during the financial crisis. Meanwhile, the 2018 Sino-American deficit was the
biggest on record. Over that year, unemployment fell from an already low 4.1
percent to 3.9 percent.

In fact, a stronger US economy causes bigger trade deficits
with the People’s Republic of China. Employment rises and we buy more,
including from the PRC. It’s extremely difficult for tariffs to protect or
create jobs because (in the US) it’s jobs that drive imports, not the other way
around. Trade doesn’t matter that much, example one.

The other side of the tariff debate is also wrong. American
tariffs on Chinese goods were first raised in 2018, with the most substantial
increases implemented over 2019. That and ongoing harm from the
pandemic led to . . . an $11 billion increase in US imports
from the PRC in the first half of this year compared to 2019. Tariffs aren’t
doing much.

Critics can complain that imports could be higher. But
another $50 billion, say, would mean little to our economy. Imports from the
PRC are just profitable, not irreplaceable. And American GDP in 2021 should
exceed $22 trillion. Net US wealth at the end of 2020 was $116 trillion.
Trade doesn’t matter that much, example two.

Protectionists get the problem wrong: Trade doesn’t cost
jobs. President Trump got the solution wrong; his tariffs have done little.
Business also has tariffs wrong. They mostly affect profitability and stock
prices of a few companies, which shouldn’t factor into national policy.

Worse than these, though, is the business community’s
solution. Recent calls to lower tariffs while negotiating difficult
issues such as state subsidies are farcical. The PRC has
fallen short of simple trade commitments and remains a cyber predator. Business groups oppose even minor
retaliation such as existing tariffs, yet pretend still more talks can change
fundamental Chinese behavior. Such groups lost their China credibility years
ago.

While tariffs and the economic impact of trade are
overhyped, the bilateral deficit plays another role. It supplies Beijing with
an enormous quantity of foreign currency. The PRC’s current foreign exchange
holdings, in official reserves and at state banks, are about $4.3 trillion. During China’s WTO
membership, from 2002 through 2020, the cumulative bilateral goods and services
deficit is $4.97 trillion. It’s our money.

Americans benefit from those imports. The PRC’s gains from
exports to the US have been greater, including a stable balance of payments and
hundreds of billions, at least, in surplus dollars to use globally. There are
partial substitutes for imports from China, including production here. Only the
US can provide Beijing so much hard currency. Don’t like the Belt and Road
Initiative or China’s other international activities? They’d be much less
extensive without us.

Economists say American trade deficits don’t matter and, in most ways, they’re right. But China is our top rival and, under Xi Jinping, verges on an enemy. We’re going to pay them another $1 trillion before the 2024 election. That shouldn’t just pass by without notice.

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