US Trade Deficit Research Articles

Trade War Between US and China

This paper examines the US-China trade war (2018-2019) and its multifaceted impact on globalization. It explores the causes of the conflict, including China's alleged unfair trade practices and the US trade deficit. The research analyzes the war's consequences on both nations, encompassing economic disruptions, job losses, and agricultural decline. Additionally, the paper investigates the impact on other countries, with some benefiting from trade diversion while others facing economic strain. Finally, the involvement of US multinational corporations (MNCs) is explored, considering their potential support for some trade war goals while opposing increased tariffs that burden their operations. Keywords: US-China Trade War, Globalization, Trade Tariffs, Unfair Trade Practices, Trade Deficit, Economic Disruptions, Job Losses, Agricultural Decline, Trade Diversion, Multinational Corporations (MNCs)

Misconceptions about US Trade Deficits Muddy the Economic Policy Debate

Misconceptions about US Trade Deficits Muddy the Economic Policy Debate

Trade Liberalization and Chinese Students in U.S. Higher Education

Abstract We highlight a lesser-known consequence of China's integration into the world economy: the rise of services trade. We demonstrate how the US's trade deficit in goods cycles back as a surplus in US exports of education services. Focusing on China's accession to the World Trade Organization, we show that Chinese cities more exposed to trade liberalization sent more students to US universities. Growth in housing income/wealth allowed Chinese families to afford US tuition, and more students financed their studies using personal funds. Our estimates suggest that recent trade wars could cost US universities around $1.1 bn in annual tuition revenue.

Asymmetric long-run effect of exchange rate on bilateral trade balance between USA and China

Purpose This paper aims to investigate asymmetric long-run effects of bilateral exchange rate on US trade imbalances with China and to examine if the effects are the same under China’s fixed and managed floating exchange rate systems. Design/methodology/approach The authors estimate both linear autoregressive distributed lag (ARDL) model assuming symmetric effect and nonlinear ARDL model assuming asymmetric effect of exchange rate on US trade deficit with China. The authors use data from 1994Q1 to 2005Q2 (under Chinese fixed exchange rate system), from 2005Q3 to 2021Q3 (under Chinese managed floating exchange rate regime), and from 1994Q1 to 2021Q3 (overall data). Findings The Chow test indicates 2005Q3 is a structure break point. Further, the results suggest the effects of bilateral exchange rate on US trade deficit with China are not the same under different exchange rate systems. The asymmetric long-run effect of bilateral exchange rate does exist. The results also demonstrate the depreciation of Chinese currency will not significantly affect US trade imbalances with China. Research limitations/implications Based on the results, the Chinese Government should embrace a more transparent and flexible exchange rate system. It will not significantly hurt Chinese trade balance, but it will help to reduce the tension between the USA and China. Originality/value All previous literature (except two papers) related to the effect of Chinese exchange rate on US trade deficit with China assume the effect is symmetric, and all (except one) use data under different Chinese exchange rate systems. To the best of the authors’ knowledge, this is the first paper that studies the possible asymmetric long-run effect of bilateral exchange rate under different Chinese exchange rate regimes.

Economic Underpinnings of Global Governance and Desired Reforms

The global economy with ‘non-system’ post-Bretton Woods system continues to be fragile. Amongst the major countries of the world, budget deficit of the federal government of the USA has been increasing every year. The leverage to borrow with ease from both internal and external sources places the US federal government in a unique position. This ‘exorbitant privilege’ of the USA to borrow from rest of the world emanates from the US$ being the dominant international currency. This is, in a way, the result of ‘the White Plan’ that got accepted at the Bretton Woods conference (1944). Along with the budget deficit, the US trade deficit has also been growing over the years, particularly so with China and Japan. The counter balancing trade surpluses of China and Japan have been rising with no system in place to rectify such a trade imbalance between these countries. This is indeed not sustainable, and needs reforms in the existing (neo-liberal) world economic order. The article argues that both the G-20 and the IMFC (IMF) may give a fresh look to the proposals of ‘the Keynes Plan’—as enunciated at the Bretton Woods conference for the desired reforms.

The European Union, the United States, and Trade: Metaphorical Climate Change, Not Bad Weather

US and EU trade relations exhibit a set of chronic and secularly unsustainable imbalances, in which new Schumpeterian leading sectors and catch-up growth create growing tension in the asymmetrical and somewhat hierarchical US–EU relationship. These imbalances exhibit two distinct cycles interrupted by a clear structural break in the 1970s and an emerging cycle after the 2008–2010 crises. Each cycle has seen rising US current account or trade deficits with Europe provoke some financial or political crisis. Each crisis produced a US-led solution producing even greater imbalances in the next cycle, with concomitant stress on the asymmetric US–EU relationship. The EU and particularly the northern eurozone economies typically have relied on export surpluses for growth. But relying on export surpluses for growth reinforces EU dependence on the US and the US dollar at a time when US domestic politics are increasingly hostile to trade deficits and tension with China is rising.

Trade in factor income and the US-China trade balance

US multindoational enterprises sell considerable amounts of products to China's domestic consumers that are “made” in either China or other countries. However, these sales are not counted as US exports to China. To account for this, we propose a beyond-borders approach to measuring trade flows that explicitly considers firm ownership, termed “trade in factor income (TiFI),” that defines the US-owned factor income induced by China's final demand as US exports to China. Applying this approach to OECD data, we find that on average from 2005 to 2016 in TiFI terms, US exports to China were 20.34% and 8.21% greater, China's exports to the US were 1.64% and 16.04% less, and the US trade deficits with China were 17.4% and 32.0% less than the trade figures reported in value added and gross terms, respectively. The concept of TiFI transforms trade measures from a territory-based “made in” label to a factor income-based “created by” label.

Trade deficits and trade conflict: The United States and Japan

The US trade relationship with Japan was characterised by periods of intense conflict over 1969−95. The paper identifies five such periods, beginning with two bitter conflicts in 1971 and ending with an equally difficult conflict over autos in 1994−95. It presents econometric evidence suggesting rising Japanese penetration of the American market and growth in the bilateral merchandise trade deficit with Japan were important causes of these crises. Over 1996–2016, US-Japan relations were handled in a much less confrontational manner, as import penetration declined. The difficulties Japan’s economy faced; heightened security concerns in Northeast Asia; a broader US shift away from unilateral measures; greater acceptance of the trade deficit; and perceptions that Japan was moving to open its economy were also important in lessening tensions in the bilateral relationship. Strong concerns with the US trade deficit re-emerged under the Trump Administration, but the two economies were, during this period, able to address trade differences without a major confrontation.

The dynamics of the U.S. trade balance and real exchange rate: The J curve and trade costs?

We study how changes in trade barriers contributed to the dynamics of the US trade balance and real exchange rate between 1980 and 2015 - a period when trade tripled. Using two dynamic trade models, we decompose fluctuations in the trade balance into terms related to trade integration (global and unilateral) and business cycle asymmetries. We find three main results. First, the relatively large US trade deficits as a share of GDP in the 2000s compared to the 1980s mostly reflect a rise in the trade share of GDP. Second, controlling for trade, only about 60% of net trade flows are due to business cycle asymmetries. And third, about two-thirds of the contribution of business-cycle asymmetries are a lagged response. For instance, the short-run Armington elasticity is about 0.2 while the long-run is closer to 1.12 with only 6.9% of the gap closed per quarter. We show that a two-country IRBC model with a dynamic exporting decision, pricing-to-market, and trade cost shocks can account for the dynamics of the US trade balance, real exchange rate, and trade integration. The model clarifies how permanent and transitory changes in trade barriers affect the trade balance and how to identify changes in trade barriers. It shows that uneven trade policy shocks substantially bias Armington elasticity estimates downward. We also show the effect of temporary trade policies on the trade balance depends on whether they induce a trade war.

US Surveillance of Foreign Currency Exchange and Macroeconomic Practices

AbstractThis article focuses on the manner in which the US identifies the exchange rate and macroeconomic policies of its key trading partners and the policy advice it gives to them, when according to the US set criteria the trading partner's exchange rate and macroeconomic policies contribute to the US trade deficit. The article focuses on the US apparatus that is set in two different pieces of US legislation concerned essentially with currency manipulation mainly from the perspective of the WTO and IMF legal regimes. The paper concludes that although the US regime concerns currency manipulation, and is implemented to address a compliance void under the IMF and WTO procedures, it is flawed and that the Reports prepared under the US legislation are not qualitatively enlightening.

Embodied carbon emissions in China-US trade

China-US trade holds great significance for the world’s political and economic landscape. Since 2018, the US government has imposed additional tariffs on Chinese exports on the grounds of the US trade deficit with China. However, the transfer of pollutants embodied in trade and the differences in environmental costs between China and the US have not been widely recognized. In this study, we quantify the embodied carbon emissions (the “virtual” emissions associated with trade and consumption) in China-US trade by constructing a carbon dioxide emissions inventory and a multiregional input-output model. The study shows that the US benefits from a trade surplus of environmental costs by importing energy-intensive and pollution-intensive products from China, which increases China’s environmental pollution and abatement costs. In 2017, 288 Mt CO2 emissions were associated with products produced in China but finally consumed in the US, and only 46 Mt CO2 were associated with the US products that were consumed in China. From this perspective, China-US trade results in a net transfer of 242 Mt CO2 per year from the US to China, accounting for approximately 5% of the total CO2 emissions in the US. More importantly, for Chinese products exported to the US, the carbon emissions embodied in one unit of economic value amount to 0.92 kg/$ (RMB: USD=6.8:1), but for US products exported to China, the carbon emissions embodied in one unit of economic value amount to 0.53 kg/$, which means China will incur environmental costs that are 74% higher than those of the US while enjoying the same economic benefits. This environmental trade deficit has burdened China with higher environmental costs thaneconomic benefits. To address this environmental trade deficit, China should actively promote further industrial upgrading and energy structure adjustment and increase investment in innovation and R&D, thereby increasing the value added per unit of export products and reducing the environmental cost of producing export products.

US trade deficit, a reality check: New evidence incorporating asymmetric and non‐linear effects of exchange rate dynamics

AbstractIn the context of the debate on the global imbalances, this study investigates the determinants of US trade balance in a non‐linear ARDL framework, which accounts for the asymmetric and non‐linear effects of real effective exchange rate dynamics. Drawing on the data from 1994Q1 to 2018Q1, our key empirical findings suggest significant evidence of short‐ and long‐run asymmetries in the relationship between the real effective exchange rate, US trade balance and its determinants. An asymmetric cumulative dynamic multiplier analysis shows evidence of an asymmetric J‐curve. Furthermore, we find that the price stability, productivity, domestic savings and fiscal deficit/discipline are crucial for the US trade balance in the short to long term. Empirical findings of this study contribute to the contemporary debate on the US trade deficit and have profound policy implications for the competitiveness of the US economy and its external balance.

Causes of U.S.-China trade imbalances: a review

PurposeIt is a common view to Trump administration and public that devaluation of Chinese currency is the origin of the US trade deficit. However, the previous literature does not support this common view. To better understand the causes of the US trade imbalances with China, this study aims to review the previous literature focusing on the causes of bilateral trade imbalances between the USA and China.Design/methodology/approachReview previous literature according to the different reasons that each paper studies.FindingsBased on the previous literature, the Chinese exchange rate is not the main reason for the US trade imbalances. The official US trade figures overestimate the amount of deficit. The actual causes for the US trade deficit with China perhaps should be the relocation of production to China, low saving in the USA and high saving in China, and the US dollar as the international currency and reserve.Originality/valueBy reviewing previous literature, the authors could better understand the puzzle of the US trade deficit with China.

The macroeconomic impact of NAFTA termination

AbstractUS President Trump has threatened to leave the North American Free Trade Agreement. How much would each member country gain or lose if this threat were carried out? Would trade imbalances within the region diminish? What would the transition to new production and consumption patterns look like? I provide quantitative answers to these questions using a dynamic general equilibrium model with a multi‐sector input–output production structure, heterogeneous firms that make forward‐looking export participation decisions, and adjustment frictions in trade and factor markets. Regional trade flows would fall dramatically, and while the US trade deficit with Canada would decline, the deficit with Mexico would grow. Welfare would fall by 0.04%, 0.12%, and 0.2% in the United States, Canada, and Mexico, respectively, and transition dynamics would significantly affect welfare in both the short run and the long run.

Trade, transport costs and trade imbalances: An empirical examination of international markets and backhauls

AbstractThe US trade deficit has been growing for over 25 years and has been accompanied by enlarging freight rate differentials. While traditional models of trade have ignored these gaps assuming symmetry across all bilateral trade costs, the specific linkages between trade imbalances and international transportation costs have remained unexplored. Given the current trade policies, the implications arising from the endogenous adjustment of bilateral transport costs to policy‐induced changes in the US trade deficit are of particular importance. To break new ground on this issue, we develop and estimate a model of international trade and transportation that accounts for the effects of persistent trade imbalances. The theoretical results are supported by our empirical analysis and indicate that bilateral transport costs adjust to a country's trade imbalance. The implication is that a unilateral import policy, for example, will cause spillover effects into the bilaterally integrated export market. To illustrate, we use our empirical results to simulate the anticipated spillover effect from the Chinese ban on waste imports. We find that China's ban and the projected 1.5% rise in the US trade deficit will lead to not only a 0.77% reduction of transport costs charged on US exports to China but also a 0.34% increase in transport costs on US imports from China.

International trade and air pollution damages in the United States

This paper investigates the health and economic consequences of trade due to various air pollutants embodied in exports and imports. We compare the US emissions generated for US exports and those that were avoided by importing. An input–output framework of the US economy is employed together with a comprehensive database on damages (expressed in monetary terms) generated by pollutants, as estimated by Muller et al. (2011). We find that damages associated with international trade in 2002 were considerable. The net result is that damages were avoided through trade and that these avoided damages amounted to 2.7% of the US trade deficit and 3.4% of the US value-added associated with trade. Moreover, the computed “damage to value-added ratios” differed greatly across industries. Exports in some industries are so hazardous that more than half of the value-added gained from extra exports disappeared due to environmental damages. These findings imply that the US might benefit more from trade by increasing its exports more in low damage-intensive products than in high damage-intensive products.

The origin of the US-China trade war

ABSTRACT The ongoing trade war (or at least dispute) between the US and China has its roots in the early 2000s when American politicians and economists started complaining about the US trade deficit with China. Accusing China of wrong-doing, as far as the US trade deficit is concerned, is based on the three propositions that the yuan is undervalued against the dollar, that the trade deficit is caused by currency undervaluation, and that Chinese trade and exchange rate policies are illegal or at least immoral, designed to promote Chinese exports and obstruct imports. These propositions are examined critically, and empirical results are produced to show that the revaluation of the yuan and the imposition of tariffs will not produce the desired results.

Mexican competitive advantage in NAFTA: a case of social dumping A view from the automotive industry

In the midst of the NAFTA renegotiations, the Mexican Automotive Industry (MAI) has drawn much attention. Gaining a progressive share of markets, jobs and portfolio investments within the region and accounting for the entire US trade deficit, the MAI is one of the most critical pieces in the way of a new NAFTA. In addition, the US President, Donald Trump, has criticised it as an example of the shortcomings of the old agreement. These facts call for a better assessment of the MAI's sources of competitive advantage. This paper builds on business cycle theories and socio-economic perspectives of market embedded institutions to provide an additional lens with which to study the MAI and NAFTA. It presents theory and evidence to demonstrate that the MAI position rests on social dumping policies that underpin illegitimate sources of competitive advantage. It then discusses the issues at stake in the current NAFTA renegotiations.

Mexican competitive advantage in NAFTA: a case of social dumping A view from the automotive industry

In the midst of the NAFTA renegotiations, the Mexican Automotive Industry (MAI) has drawn much attention. Gaining a progressive share of markets, jobs and portfolio investments within the region and accounting for the entire US trade deficit, the MAI is one of the most critical pieces in the way of a new NAFTA. In addition, the US President, Donald Trump, has criticised it as an example of the shortcomings of the old agreement. These facts call for a better assessment of the MAI's sources of competitive advantage. This paper builds on business cycle theories and socio-economic perspectives of market embedded institutions to provide an additional lens with which to study the MAI and NAFTA. It presents theory and evidence to demonstrate that the MAI position rests on social dumping policies that underpin illegitimate sources of competitive advantage. It then discusses the issues at stake in the current NAFTA renegotiations.

Understanding Trump's Trade Policy with China: International Pressures Meet Domestic Politics

The trade confrontation between the United States and China has heightened global concerns that a trade war between the two largest economies would have serious consequences for the world economy. This article suggests employing a neoclassical realist framework to examine Trump's trade policy with China as to best explain the US–China trade disputes since 2018. It argues that Trump's trade policy with China is fundamentally driven by the increasingly competitive US–China relationship, which is influenced by Trump's perception of China as America's primary strategic competitor and concern with the US trade deficit, and reinforced by the Trumpization of the Republican Party under the US domestic polarization. The neoclassical realist analysis suggests that the trade tension embedded in the strategic competition between the two countries is likely to continue for a considerable time.