It’s become increasingly clear in the last few days that President Trump’s trade war with China and his apparent efforts to decouple the U.S. and Chinese economies have achieved real successes. Just why exactly? Because of a recent flurry of claims in the Mainstream Media that the trade war has been an ignominious defeat for the President and his tariffs, and that decoupling can only backfire on America if it’s taken too far (an outcome that’s supposedly imminent). (See here, here, and here in particular.)
As RealityChek regulars know, such media doom- and fear-mongering – spread both by journalists and by the purported experts they keep quoting who have been disastrously wrong literally for decades about trade and broader economic expansion with China – are now well established contrarian indicators. And here’s some of the key data that these proven failures have overlooked.
Let’s start with the least controversial measure of decoupling – two-way trade. Let’s generally use the end of the previous administration as our baseline, since decoupling really is a Trump-specific priority. And let’s generally end with the end of 2019, not only because it’s our last full data year, but because the coronavirus pandemic clearly is distorting the data, and won’t be with us forever (although some of its effects on supply chains and the like might – also because of reinforcement from the trade war). We’ll also stick with goods trade, since detailed service trade figures are always late to come out, and because they’re rarely major subjects of trade policy.
Between 2016 and 2019, combined US goods imports from and goods exports to China actually grew by 2.92 percent. So where’s the decoupling, you might ask? It becomes clear from using economic analysis best practices and putting these figures into context – mainly, the performance of the entire economy.
And in this case and many of those below, it’s crucial to know that the economy grew during this period, too. As a result, in 2016, this two-way goods trade (also called merchandise trade) amounted to 3.08 percent gross domestic product (GDP) – the nation’s total output of goods and services. In 2019, it was down to 2.60 percent. That is, like a supertanker, this trade doen’t turn around right away.
Therefore, it is indeed legitimate to fault Mr. Trump for claiming that trade wars are easy to win. But the supertanker is turning. And the impact on the economy? In 2016, it expanded by 2.78 percent. In 2019? 3.98 percent. So not much damage evident there. (All these figures are pre-inflation figures, because detailed inflation-adjusted trade figures aren’t available.)
Similar trends hold for the U.S.-China goods trade deficit, which the President views as the most important scorecard for his China trade policy success. Between 2016 and 2019 in absolute terms, it barely budged – dipping by just 0.47 percent. That could be a rounding error.
But viewed in the proper context, this trade deficit fell from 1.85 percent of GDP to 1.61 percent. And again, the economy grew much faster in 2019 than in 2016.
It’s still possible to ask what any of the trade decoupling had to do with the President’s ballyhooed tariffs. But the only reasonble answer? “A lot.” That’s because even after the signing of the so-called Phase One U.S.-China trade deal in January, levies of 7.5 percent remain on categories of imports from China that have been totalling about $120 billion annually lately, and tariffs of 25 percent remain on $250 billion more. (That’s most of the $451.65 billion in total goods imported by the United States from China in 2019.)
For comparison’s sake, between 2016 and 2019, the U.S. worldwide non-oil goods trade deficit – that’s the deficit that’s most impacted by trade policy decisions like tariffs, and the portion of the deficit that’s most like US-China trade – rose by 24 percent. That’s more than 50 times faster than the increase in the China goods deficit.
So there can’t be any serious doubt that the Trump China tariffs have worked both directly (by keeping Chinese goods out of the U.S. market) and indirectly (by encouraging companies that had been producing in China for export to the United States to move elsewhere). Moreover, since that “elsewhere” is always to much friendlier countries, that’s a plus for Americans even though the decoupling by most accounts has only returned modest amounts of jobs stateside.
Moreover, there’s a strong case to be made that the Trump tariffs on China have prevented the U.S. economy’s CCP Virus-induced recession from being much worse. That contention is borne out by the fact that, as RealityChek reported earlier this month, the latest available apples-to-apples statistics show that China’s goods trade surplus with the world as a whole had increased by some 25 percent between July, 2019 and July, 2020. But during that period, the China goods surplus with the United State fell by about 18 percent.
As a result, according to the standard way of measuring the economy and how developments in areas like trade affect its growth or shrinkage, China over roughly the last year has been growing at the expense of the world as a whole, but not at America’s. Indeed, quite the opposite. After decades of trade with China slowing U.S. growth, such commerce is now supporting growth.
The decoupling picture, however, wouldn’t be complete without investment flows. Here, on one front, the disengagement has been even more extensive. The consulting firm Rhodium Group does a good job of crunching the numbers on foreign direct investment (FDI) – those transactions that involve so-called hard assets, like real estate and factories and warehouses and entire companies, as opposed to portfolio investment, which involves stocks, bonds, and other financial instruments.
By a happy coincidence, Rhodium has just issued its latest report, which takes us through the first half of 2020. Yes, that covers the virus era, when it’s natural to expect all kind of economic and commercial activity to decline. But the pre-virus era trends will become clear enough, too.
According to Rhodium, two-way FDI flows between the United States and China in the first six months of this year (measured by the value of completed deals) hit their lowest level since the second half of 2011. And the peak came during comparable periods between early 2016 and late 2017 – when these investments were running nearly four times their current levels. Moreover that peak, not so coincidentally, bridged the Obama-Trump transition.
Chinese FDI into the US during that first half of this year actually rose a great deal – from $1.3 to $4.7 billion. But this increase resulted entirely – and then some – from a single purchase by the big Chinese social media company WeChat of a 10 percent stake in the U.S. company Universal Music. Without that transaction, Chinese flows into the US would have dropped, and even the current somewhat artificially high level is only about a fifth as high as its peak – hit in late 2016. So you can see a decided Trump effect here, too.
U.S. FDI flows into China have held up better, if that’s the term you want to use. But they were off 31 percent between the second half of 2019 and the first halfof this year – to $4.1b. And their peak level – hit in 2014 – was $8.5b. So that’s another big Trump-related drop.
One disturbing counter-trend that the Trump administration has been too slow to address: There’s abundant evidence that U.S. financial investment into China – buys of assets like stocks and bonds – keeps surging.
One indication: According to the Financial Times earlier this month, since the Wall Street firm MSCI in June, 2017, first announced plans to include Chinese domestically listed “A-share” companies into one of its widely followed indices, “roughly $875bn in foreign investment has flowed into Chinese equities through stock connect programmes linking Hong Kong with onshore bourses in Shanghai and Shenzhen.”
And although the U.S. share is difficult to quantify, between private investors and state-level government workers’ pension funds, this analysis from the U.S. Securities and Exchange Commission makes clear that it’s considerable. (Due to Trump administration pressure, the body overseeing federal pension plans’ investments has delayed a decision to channel funds into the aforementioned MSCI index.)
So can anyone reasonably claim “Mission accomplished” for the Trump trade and decoupling policies? Not yet. But is a “job well done so far” conclusion merited? Certainly for anyone who’s not Trump-ly Deranged.