Introduction
Over the past two decades, there has been an active growth of global imbalances, manifested in the deficit of US foreign trade and, at the same time, in the large positive balance of many developing countries. Leaders of the modern world like the USA, as well as developing countries, have a negative trade balance, but the United States actively imports capital and attracts loans, leveling a negative trading account with a positive financial account. In this regard, it is of interest to consider the US trade balance in terms of its impact on the country’s economy, as well as in the context of the ongoing phenomenon of a trade war with China.
The U.S. Trade Balance Issues
When comparing the two main US foreign trade indicators, it becomes clear that there is a huge imbalance. A negative trade balance means that goods imported into the country are higher in value than goods exported abroad. In turn, a large imbalance has an impact on the country’s currency. In 2019, the general US trade deficit 2019 decreased for the first time in the last 6 years due to a more rapid decline in imports compared with exports against the background of prolonged trade tension. The deficit in trade in goods and services in 2019 decreased by 1.7% and amounted to 616.8 billion US dollars, which is 2.9% of GDP compared to 3% in 2018, this is the first decrease since 2013 (The US Census Bureau, 2020). In 2019, exports decreased by 0.1%, amounting to 2,499.8 billion dollars, due to a decrease in the supply of capital goods, industrial goods, and materials, while imports fell by 0.4% to 3,116.5 billion dollars, due to a decrease in the volume of imports of industrial materials and goods, computer accessories, telecommunications equipment and consumer goods (Kalish & Wolf, 2020). The U.S. trade deficit in 2019 was 2.9% of GDP, compared with 3% in 2018. In December 2019, the deficit in foreign trade in goods and services increased by 11.9% compared to the previous month and amounted to 48.88 billion dollars. Import in December 2019 increased by 2.7%, while exports rose 0.8% to 209.64 billion dollars (The U.S. Census Bureau, 2020).
The shortage of trade in goods with China fell sharply in 2019, while in the case of Mexico and the EU, this indicator reached a high record. The Administration of Donald Trump earlier promised to reduce the trade deficit and increase annual economic growth to 3 percent on a sustainable basis (Kalish & Wolf, 2020). However, the economy failed to achieve its goal. U.S. economic growth in 2019 slowed to 2.3 percent compared to 2.9 percent in 2018 amid uncertainties due to trade tensions and weakening global growth (The U.S. Census Bureau, 2020). Moreover, the interest rate on the country’s ten-year government bonds is currently lower than on short-term, which raises concerns about a possible recession in the USA. Nevertheless, paradoxically, the recession in America can help improve bilateral economic relations with China and smoothen the escalating trade dispute between the two countries. The recession in the USA, reducing the demand for imports, as a rule, harms countries with a large contribution of trade to GDP, including China. However, in recent periods of recession, the United States has been more inclined to work with China than usual in an attempt to accelerate recovery. This tendency is also found at present, in the form of a weakening of the trade war with China.
The Implications of USA-China Trade War
The active phase of tariff opposition has affected the growth of global trade and the economy. The trade war has already hit China hard ‑ the country’s GDP in the second quarter of 2019 has slowed to a record low since March 1992, and now it has also begun to hit the United States. The two strongest economies in the world suffer not only direct financial losses, but also lose their markets. Third countries took advantage of this, having begun to occupy niches vacated in the USA and China. To one degree or another, at least two dozen countries, including Russia, have received or expect to receive benefits from the trade war. However, the damage is not evenly distributed: the revision of bilateral trade with China, the restriction on the export of technology, and sporadic sanctions (for example, for Huawei) hit the locomotive of the Chinese economy. The introduction of additional restrictions in the financial sector can also trigger a recession in China. The decline in production in China will have disastrous consequences for Southeast Asia, as well as for exporters of raw materials, including Australia and Brazil.
Losses in the United States markedly affected certain areas, but they did not have a serious macro effect. However, the increase in duties on the part of the United States actually hit American companies. Most of the imports that fell under the increase in duties are products of intermediate demand ‑ that is, materials and components that are used by US companies for their production. In the USA, such sectors as construction, transportation, telecommunications, mechanical engineering, computers, and electronics suffer most from the increase in tariffs on Chinese goods.
The trade war between Beijing and Washington became, in fact, a political confrontation, where the economy made a pretext for the beginning of the open rivalry between the parties. The war has already influenced the development of the world economy, and the adopted agreements of this year are likely to affect world politics since an increase in the supply of goods from the USA to the PRC will lead to a reduction in Beijing’s trade with other partners. As a result, the agreement between China and the United States will force other Beijing trade partners to build similar trade mechanisms to protect their suppliers from the competition with Washington in the Chinese market.
Conclusion
The current US deficit is covered by the influx of foreign capital into the country. Large capital inflows to cover the US current deficit are a prerequisite for the stability of the global monetary system. The inflow of foreign capital, covering the current account deficit, is an independent process. It is determined by the interests of American and foreign TNCs, the growth rate of the US economy, financial market conditions, the monetary policy of the USA, and its main partners in the world economy, etc. The United States is a net importer of capital and a net international debtor depending on a steady flow of foreign capital. In this regard, trade wars obviously have a negative effect on the American economy.
US trade duties imposed on Chinese goods have helped reduce the bilateral deficit with China. However, the trade balance between the two countries does not matter where ‑ the overall US trade deficit matters. It continues to increase because the US trade imbalance with the rest of the world is growing much faster than the deficit with China. Protectionism in the form in which it is implemented by Trump does not achieve the stated goals. Duties did not lead to an increase in output or employment in industry, even taking into account rising producer prices.
References
Kalish, I., & Wolf, M. (2020). US-China economic relations monthly update. Deloitte Insights.
The U.S. Census Bureau (2020). Foreign Trade. Web.