Perhaps the most important aspect to understand about the trade-related tensions between China and the United States is the fact that the stakes are extremely high. According to the Office of the United States Trade Representative, China is currently the most significant trading partner of the United States, with roughly $737 billion in goods and services traded over the year 2018.
However, what’s problematic is the fact that the balance between exports and imports is just not there. At this point in time, the United States is at a humongous commercial deficit when it comes to trading with China. More specifically, the United States imported a staggering $557.9 billion in goods and services from China and only exported $179.3 billion.
Goods account for the lion’s share of trading between the two nations, with almost $659.8 billion as a grand total for 2018: only $120.3 in US exports of goods to China, compared to $419.2 billion on the imports side. When the ratio is almost in 1:4 territory, it should come as no surprise that political players tend to get uneasy in Washington.
A common talking point among pundits is represented by the far better situation with respect to services, with the United States actually exporting more than it imports. However, the pundits in question aren’t painting the full picture by failing to mention the fact that with a grand total of just $77.3 billion, the volume is just not there. While it is good news for the US service sector that the United States are in surplus territory to the tune of $40.5 billion ($58.9 billion in exports compared to just $18.4 billion for exports), it’s just not enough to offset the extremely high deficit for goods.
To quantify things around job creation, exports of goods to China only created two times more jobs than service exports despite the much higher volume.
Still, even with this severe imbalance, there are quite a few US companies that produce goods and are happy with the status quo in light of the fact that China represents the 3rd largest market for US goods exports, with approximately 7.2% of all 2018 exports going to China. Should this situation deteriorate for political reasons, the collateral damage implications would be significant.
The same way, however, we have to see things from China’s perspective and realize that Chinese exporters would be even more affected, with China being the #1 supplier of goods for the United States. Strictly from a trade perspective, China would most definitely have more to lose than the US if a serious trade conflict were to develop.
However, do keep in mind there is more to economics than just trade. Let us not forget China’s over $3 trillion in US Dollar-denominated reserves, the fact that the United States is able to currently borrow capital from Chinese entities at extremely low interest rates and the list could go on and on. Trade escalations would most likely lead to retaliation on both sides that would take many forms, with China most likely choosing to weaponize its holdings of assets denominated in US Dollars.
As such, once we realize just how complex the entire equation can become, it’s not difficult to understand that there are many forces driving China and the United States away from one another, there are more forces bringing them back together. A severe deterioration with respect to trade between the #1 and #2 nations in terms of both nominal GDP and PPP GDP is likely to cause unprecedented damage that goes considerably beyond arithmetic.
The experts on the various negotiation teams (on both sides, of course) know this all too well and as such, leaving political rhetoric and carefully-weighted economic measures aside, the incentives to ultimately reach a win-win (or at least mutually acceptable) agreement far outweigh the incentives to try the unprecedented on for size and never look back.