Commentary: Trump’s irrational obsession with the China trade deficit

“It’s time to look at the strength we get from making sure our businesses can compete, even if it means higher prices in the near term for American buyers.”

— Ted C. Fishman, author of “China, Inc.: How the Rise of the Next Superpower Challenges America and the World”

We hope Fishman’s quote, is focused on America’s future economic prospects rather than its past. This is relevant because regardless of what Trump promises, there are no policy prescriptions that will revive the decline of America’s low-tech manufacturing sector already decimated by technology change, globalization, and de-industrialization. Economies structurally change over time and a country’s comparative advantage is subject to dynamic evolutionary forces.

Trade is about efficiency and specialization. With few exceptions, individually we do not attempt to make the things we consume. We specialize in what we do best and use our income to purchase goods and services others produce more efficiently. Trade is similar — while it does create and destroy jobs, it also leads to economic growth and more efficient resource allocation across the economy.

Trump’s obsession with our trade deficit with China is illogical. Every citizen runs deficits with organizations we buy goods and services from and surpluses with employers. Should we try to balance our exchanges with gas stations, grocery stores, etc. and seek a balanced flow also with our employers? No. Nor should countries worry about these individual imbalances.

What about our overall trade deficit? First and foremost, the U.S. does not run a trade deficit because of bad trade deals. A trade deficit and the concomitant Current Account Deficit leads to a Capital Account surplus. That surplus finances investments which grow our economy and funds federal deficits.

Any country that consumes more than it saves will need foreign capital to the fund the growth of its economy and finance its debts. The sum of U.S. consumer, corporate, and government debt exceeds the supply of loanable funds generated by national saving. If Trump is serious about reducing the size of the U.S. trade deficit his focus should be on reducing deficits instead of tax cuts that enlarge the deficit.

Trump is right about China’s efforts to steal American technology and intellectual property. Their malfeasance in enforcement of IP standards, industrial espionage, forced technology transfers and acquisitions of American tech companies are all illustrations of a deliberate industrial policy designed to overtake the U.S. economically. The Made in China 2025 industrial strategy aspires to put China at the forefront of strategic industries like robotics, aerospace, and information technology. These initiatives focus on accelerating China’s emergence as the next world economic power.

Trump’s focus on the trade deficit is misguided. Reducing China’s theft of American technology is much more important. Estimates suggest China steals between $225 to $600 billion annually. This is a clear and present danger to the long run interests of the U.S. As Paul Kennedy noted in “The Rise and Fall of the Great Powers,” America’s global military supremacy as the backstop to democracy and free-market institutions, depends on our continued status as the global economic leader.

Unfortunately, some American companies have facilitated China’s plans for economic dominance. A key part of the China 2025 strategy is the requirement that foreign companies seeking to access the Chinese market must joint-venture with Chinese companies. Instead of U.S. companies having full control of their operations and technology, they must partner with a Chinese firm sharing propriety knowledge and competitive advantages. This tactic of Chinese industrial policy takes advantage of the avaricious rent-seeking of some American companies.

Trump’s threats of additional tariffs recently brought China to the bargaining table in Buenos Aires, bringing about a three-week postponement of plans to implement additional tariffs of 10% to 25% on $200 billion of Chinese goods. We urge the president to use this negotiating period to focus on protecting America’s long-term strategic position as the global leader in technology and innovation. Protecting our competitive advantages is requisite to maintaining America’s status as a global economic and military power. Mr. Trump, this is what we hope you and your negotiators will accomplish in this interim negotiating period.

Cydney Emery and Isaac Pitcher are seniors majoring in economics at Westminster College. James “Cid” Seidelman is distinguished service professor of economics and former provost of Westminster College.