A trade deficit is when one country imports more from that country then they export. The change in competitiveness between two countries can arise from a change in relative prices of their tradable goods or a change in their relative exchange rates.
The ongoing concern for the USA is the unsustainable imbalance of international trade. Over the last 40 years, American companies would like reciprocity with other trading countries in order to expand American Exports.
A developing country usually would export more than a developed country, as their products are sold based on price. The developing country does not have the economies of scale to support the imports from the mature country (USA).
Global trade deficit in the USA
The trade deficit has been increasing since the early 1970s, over the last 20 years the USA global trade deficit is toppling $7.5 Trillion.
You can see from the above chart international trade felt the pressure of the USA recession in 2008.
Exploring the trade deficit with China
The number one contributor to the US trade deficit is China, hence Trump is focused on resolving this issue.
The chart below highlights how the trade deficit with China has been growing for the last 25 years. A majority of the $7.5 trillion US trade deficit is with China.
The Chinese middle class has been growing at unprecedented rates and has been purchasing more products from around the world. There have been lots of opportunities for American businesses to sell more into China.
There are many other factors not taken into consideration when comparing the trade deficit. You need to take into consideration the number of American companies operating in China and the number of Chinese businesses operating in America.
American businesses operating in China
There are hundreds of American businesses operating in China that represent billions of dollars in revenue.
Many American companies enter into a joint venture with Chinese partners to alleviate some of the issues of being a WOFE (Wholly owned foreign Enterprise). The chart below looks at five American companies operating in China.
|Company||Year||Number of locations||Revenue (billion)|
The challenge is to determine the true figures of export/import products that are produced in China that are sold as finished goods in America.
Chinese companies invested $51 billion in the USA through 65 deals and Chinese investments made up 12% of all inbound mergers and acquisitions in the USA in 2016.
As we can see from the above chart the total global trade with China is declining and will continue to decline as the Tariffs make it more expensive to do business there.
Growth of developing countries
The USA is sourcing from other developing countries in South East Asia so the decline in the trade deficit will be filled by those countries.
This will create a larger trade deficit with the developing countries? The trade deficit between the USA and Vietnam will continue to grow, as did the deficit with China some 25 years ago and Japan 40 years ago.
In 2018, Vietnam exported $49 billion to America and only imported $10 billion. This is the same 5 times multiple as China and the USA today.
In 2013, Vietnam exported $24.5 billion to America and only imported $5 billion. This is a 100% increase in five years before the tariffs, what will the trade deficit be with Vietnam in another five years (2023)? With the challenges in today’s economy, the USA trade deficit with Vietnam could be $100 billion.
There is a huge opportunity for American businesses to sell more products and services in China. American businesses need to explore more opportunities to sell products and services to developing countries as the USA was once a developing country and has insights, expertise, and experience.
Comparing China and Australia trade, China has imported $110 billion in products from Australia (mostly in the form of raw materials) compared to the USA at $120 billion; comparing the size of each country Australia is 8% of the population of America.
Businesses in America should study the countries with a more balanced deficit with China, South East Asia, the economic policies and techniques that made this possible