I am fascinated by macroeconomics and the variety of elements that change dynamics of local and global markets, sometimes in unexpected ways.
US trade deficit with China is in no better shape now than a year ago. In fact, it is expected to increase by almost 10% to over $370 billion in 2017 compared to $347 billion in 2016.
In the recent visit to China:
- The United States is asking China to curb its trades with North Korea. China is North Korea’s top trading partner, as well as USA’s top trading partner. I am not sure how US can negotiate to narrow its trade deficit with China, while also asking China to curb its financial ties with the North Korea, and let US army be strongly present in the area.
- Even more interesting, Shen Jianguang, an economist at Mizuho suggests that demand is much higher in China than in the United States! This means that US companies need the Chinese market more than China requires the US market. I would still have some questions to ask him, nonetheless this is an interesting notion.
Tax, interest rates and regulations play major roles in the economy of the United States, especially now that the unemployment rate and interest rates are at their lowest, but inflation is not growing much. Unfortunately all three factors, especially taxes and deregulation are so politicized and impacted by lobbyist as well as populists that the real purpose of any changes are dubious and the final outcome of lawmakers’ decisions may not necessarily spur economic growth.
A fourth factor however, should not be overlooked: the power of innovation and disruption, especially in IP-intensive industries to increase growth and reduce trade deficit. China has been forming joint ventures with many US firms (in exchange for giving them access to the Chinese market). The IP (Intellectual Property) did not necessarily stay within the joint venture. Second issue is China’s new cyber security law, which (some believe) will give unwanted access to US IP. -Details are out of the scope of this article.
Unfortunately, I do not see any details on how (or whether) the US administration or Mr. Ross discussed, or is planning to discuss IP issues with the Chinese government. Second, I am not sure if the new tax laws or deregulation will help to augment demand in the US by increasing overall wealth and focusing on middle income class. In the absence of solid solutions to either of the two above-mentioned concerns, resolutions to trade deficit imbalance may not be as effective or long-term.
References:
a) https://www.wsj.com/articles/china-trade-surplus-widens-in-october-1510116345
b) https://www.wsj.com/articles/trumps-china-trip-brings-admonitions-on-north-korea-along-with-business-deals-1510147113
c) https://thediplomat.com/2017/10/slow-and-steady-us-intellectual-property-and-the-china-challenge/