Question

What are your thoughts on the ongoing trade talks between China and the United States? President Trump has made it an important goal of his administration to try to level the playing for American producers.

Without letting politics outweigh the economics, offer your thoughts on these trade negotiations. Most agree that an all out trade war would negatively impact both economies, at least in the short run. Is this a fight worth sacrificing for?   

Answer 1

Before looking at the current scenario, the following points are important to note -

1. The United States has witnessed sustained trade deficits for the last two decades

2. Trade deficits is one of the factors that has resulted in swelling federal debt, which now stands at $22 trillion

3. American consumers are already over leveraged and with an ageing population, it is unlikely that the consumption boom sustains

With these key points as an overview, the current trade war and the trade discussion between the United States and China is critical for the US economy. To put things into perspective, the US economy was largely manufacturing and production driven in the 1960s and 1970s. However, this changed gradually with consumption spending now accounting for nearly 70% of GDP.

It is of paramount importance for the United States to create a finer balance between production and consumption in the coming years. This will not only boost investment and jobs growth, but also help in reduction of trade deficits and debt.

However, it is also worth noting that trade wars is not the solution to the problem. Tariffs or import/export quota would result in retaliatory measures by other countries (already being seen) and that will be counter productive for the US economy.

Therefore, the right approach is to resolve the issue through talks. In particular, the challenge is to reduce the trade deficits with China. While the United States had excess deficits, China witnessed swelling surplus. It is therefore, important for the Chinese economy as well to allow the yuan to appreciate as it will result in a consumption boom in China. While the United States is largely a consumption based economy, China is largely production based. Allowing the yuan to appreciate would imply finer balance of production and consumption in both economies.

At the same time, it is important to have policies like lower tax or tax holidays for manufacturing companies within the United States. While negotiation with China and other trade members provides a solution, the other strategy is to allow the manufacturing sector within the United States to boom through conducive policies.