How big is the U.S. trade deficit?
_Part one of a three-part interview with Professor Masao Suzuki _
This is part one of a three-part interview. Click for part two and part three of this interview. Fight Back!: Professor Suzuki, there has been a lot in the news about the Trump administration’s new tariffs and the U.S. trade deficit. How big is it really?
Masao Suzuki: Trump claims that the U.S. trade deficit with China is $500 billion. But this figure, like many by President Trump, is wrong. The actual U.S. trade deficit with China in goods is about $375 billion, meaning that the U.S. imports about $375 billion more in goods from China, like the iPhones, then China imports goods like soybeans from the U.S. But the U.S. actually has a surplus, meaning we export more to China than we import from them, in services. For example, the American-made movie Black Panther, opened in China as number one in their box office. So together the U.S. trade deficit with China was about $337 billion in 2017.
Fight Back!: That still seems like a large number.
Suzuki: Yes, it is. But the U.S. trade deficit with China is deceptive, because many of the goods that the U.S. imports from China are just assembled there, and their parts are often imported from other countries. Take for example again, the Apple iPhone. Less than 5% of the value of the iPhone is added in China, almost half comes from parts made in Japan and Germany. So what we should look at it is a country’s overall trade balance, not just the balance with one other country, which can be misleading.
Fight Back!: So how do the U.S. and China’s total trade balances look?
Suzuki: Well let me make two more important adjustments to the numbers. The first is that we should include the income that U.S. corporations and investors get from the rest of the world. For more than 100 years, U.S. corporations and wealthy individuals have been investing around the world – indeed this total foreign investment of almost $21 trillion is huge.
The second adjustment is measure this so-called “current account” balance in terms of the size of the U.S. economy. This allows for better comparison with other countries in the world, whose economies are individually all smaller than the U.S., and to look at how our balance has changed over time. The standard measure of the size of the economy is Gross Domestic Product, or GDP. GDP measures the production of goods and service during a year in a country, which is the basis for jobs and income. Last year the U.S. GDP was over $19 trillion.
Fight Back!: Whew. And?
Suzuki: The U.S. current account deficit was about 2.3% of GDP last year. While this is still a substantial number, it is only half the size that it was ten years ago in 2008. The big difference is that the U.S. used to run a huge trade deficit in petroleum products as we imported massive amounts of oil. But with the surge in domestic production, largely because of fracking, the trade deficit in oil has fallen dramatically, along with the overall U.S. current account deficit.
China, on the other hand, does have a current account surplus, based on it exporting more goods than it imports. China’s current account surplus used to be quite large – ten years ago it was seven times as large, at over 9% of GDP. But last year it was down to 1.3% of GDP – even less than what it was almost 20 years ago, before China joined the WTO [World Trade Organization]. What happened? China has made big efforts to raise people’s standard of living by encouraging more domestic consumption of goods and services, and also has emphasized a shift towards services. One factor helping this along was the large increase in the value of the Chinese currency, which makes their exports more expensive and makes it cheaper to import foreign goods and services into China. This so-called “rebalancing” of the Chinese economy has dramatically cut their current account surplus.
Fight Back!: If China’s surplus isn’t that big, which country does have a big surplus?
Suzuki: Among the world’s larger economies, Germany has the largest current account surplus, at over 8% of GDP.
Fight Back!: But we don’t hear Trump complaining about Germany’s big surplus…
Suzuki: Maybe he is just trying to be chivalrous to German Prime Minister Merkel.
Fight Back!: Ha-ha. Sorry professor, but your economics is better than your humor.
Suzuki: No problem. I’m sure that almost all my students would agree with you.
Masao Suzuki teaches economics.