Misguided and dangerous thinking in Washington makes a trade war between the US and China increasingly likely, writes Steve Hanke.
The US has recorded a trade deficit in every year since 1975. This is not surprising – America spends more than it saves, and this deficit is financed by means of a virtually unlimited US line of credit with the rest of the world. Economies that save more than they spend, and which record corresponding trade surpluses, ship funds to the US to finance America’s insatiable spending.
Japan and, more recently, China have been the primary creditors for the savings-deficient US. Rather than a straight-forward barter-like transaction, Asia’s exports to the US are paid for by credits to the US. The result is a huge trade surplus for Asia, largely in manufactured goods, and a build-up of dollar claims against the US. The US runs a trade deficit and a capital account surplus with these economies. China and Japan have been responsible for the lion’s share of the US trade deficit. Japan’s contribution has fallen from a peak of just under 60% in the early 1990s to around 10% today, while China’s contribution has steadily risen from around 20% in the early 1990s to 48% today.
The US savings deficiency has contributed to the hollowing out of American manufacturing. This is one subject which President-elect Donald Trump has never mentioned. Instead, he claims that American manufacturing has been eaten alive by foreigners who adopt unfair trade practices and manipulate their currencies to artificially weak levels. This argument is nonsense. [...]
China-bashing is in vogue. Hardly a day goes by without Trump railing against China, accusing it of unfair trade practices and currency manipulation. Against the background of his threat to impose punitive tariffs on the Chinese, the spat over Trump’s Friday phone call with Taiwan President Tsai Ing-wen, breaking decades of diplomatic protocol, offers an uncomfortable foretaste of more squalls ahead.
Trump's spending and tax promised will widen the gap between America’s spending and savings. This will cause America's trade deficit to balloon. When that happens, in view of China's high contribution to the deficit, Trump will undoubedtly point an accusatory finger at China. A trade war between the world's top two economies looks increasingly likely.
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