It was April of 1986. The national debt hit $2 trillion, Michael Jordan set the NBA playoff record with 63 points in a game, Geraldo Rivera disappointed the country with Al Capone’s empty vault – and the US recorded its final trade surplus with China. It is difficult to fathom that America has not exported more to China than it has imported since the era of former President Ronald Reagan. Despite promises by Republicans and Democrats to reverse this trend, it will be a monumental task for future American leaders to eradicate the trade deficit with Beijing.
US-China Trade Deficit
In December, the overall US trade deficit increased by $67.4 billion, slightly lower than market estimates of $68.5 billion, according to the Bureau of Economic Analysis (BEA). US exports tumbled 0.9% to $250.2 billion, a drop driven by crude oil, non-monetary gold, foods, and beverages. Imports jumped 1.3% to $317.6 billion, led by purchases of passenger automobiles and mobile devices. In total, the 2022 trade gap advanced to an all-time high of $948.1 billion, representing nearly 4% of the gross domestic product (GDP).
Despite China’s economic downturn, Washington failed to take advantage of the red dragon and try to trim the bilateral trade deficit or record a surplus in any month last year. Instead, the US ran a trade imbalance of $382.91 billion, as the nation imported $536.75 billion in goods and exported just $153.83 billion. Except for a handful of months, the US has posted an annual trade deficit every year with China since 1985. The last time the United States enjoyed a monthly surplus was in April 1986, when America sold $318.9 billion and bought $264.9 billion in goods from Beijing.
It is not only the world’s second-largest economy; the US buys more than it ships everywhere. BEA data from last year show that deficits were recorded with the European Union ($203.9 billion), Mexico ($130.6 billion), Vietnam ($116.1 billion), Canada ($81.6 billion), Japan ($68 billion), Russia ($12.7 billion), and many others. By comparison, the US posted surpluses with the Netherlands ($38.3 billion), Hong Kong ($21.1 billion), Singapore ($14.5 billion), and the United Kingdom ($13.3 billion).
In 2022, two main factors generated these numbers: a strong greenback and weakness in international trade.
The US Dollar Index (DXY), which measures the buck against a basket of currencies, surged as much as 20% before cutting its gains in half in the final few weeks of the year. From global economic uncertainty to incompetent monetary and fiscal policymakers, investors sought refuge in the international reserve currency. This allowed the US dollar to appreciate in value, which morphed into a double-edged sword because it caused US-made goods to become more expensive in global markets.
For now, according to many metrics, the global manufacturing sector is in a recession, be it the S&P Global Manufacturing Purchasing Managers’ Index (PMI) or the Institute for Supply Management’s (ISM) Manufacturing PMI. Global economic conditions have been slowing since the summer amid central banks’ tightening efforts, shrinking worldwide business activity, and making credit more expensive. At the same time, this has been a blessing for energy prices since slumping industrial demand has allowed crude oil, natural gas, and diesel costs to moderate.
The Trouble With China
Despite everything that has occurred in China since the beginning of the coronavirus pandemic, it proves just how dependent the US economy is on Beijing for a broad array of goods. The Chinese economy has only recently lifted its COVID-Zero protocols that effectively shut down large swathes of the market. And yet, the United States still failed to record a single surplus in any month since the COVID-19 public health crisis began in early 2020. Will this change in the coming years? President Joe Biden indeed suggested it could in his State of the Union address, but both sides have made this promise before. Even under former President Donald Trump, the US deficit with China reached an all-time high of $418 billion in 2018.
Although there has been plenty of talk of repatriating American businesses, the more likely scenario is that US companies will shift operations to friendlier locations, like Vietnam, Thailand, or India. In other words, a white t-shirt or banker’s lamp sold at Walmart might not be branded with a Made in China tag in the next few years. Instead, this piece of apparel or furnishing may be Made in Vietnam.
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