© 2018, Farok J. Contractor, Rutgers Business School
Acting on his campaign rhetoric that China is “raping our country,” Don Trump recently announced a 25 percent tariff on steel, 10 percent on aluminum, 30 percent on solar panels, and 20–50 percent on washing machines—products he alleged are being “dumped” by the Chinese—and threatened a “trade war” against that country.
The objective of this article is to present 10 salient facts (not opinions) about US trade in the wake of the aggressive stance taken by the Trump administration. I seek to supply clear answers and unbiased perspectives to questions such as:
- How bad is the problem, really?
- How much does China figure in the problem?
- How has the US managed to sustain a trade deficit against the rest of the world and China since 1975—the past 43 years?
- What exactly is “dumping”?
- Who “wins” and who “loses” from international trade?
- Is China “stealing” intellectual property and technology from Western companies?
My hope is to simplify the national dialogue and clear up the ambiguity accompanying the increasing numbers of press reports about a topic that affects all Americans.
See related post: WWMS? (What Would Milton Say?)
FACT 1: In 2017, the US “suffered” a deficit of $337 billion with China (and it has been getting worse each year).
As Figure 1 illustrates, the overall trade deficit the US had with China amounted to $337 billion in 2017. In goods (merchandise) alone, the deficit was even worse at $376 billion. The one small bright spot is that the US “enjoys” a surplus of $39 billion in services, which reduced the overall deficit to “only” $337 billion.
Figure 1. US vs. China – Merchandise and Services Trade (2017)
FACT 2: The US applies a weighted mean tariff on all imported products of only 1.6 percent.
According to the World Bank, on average, the tariff (customs duty) collected by US customs is only 1.6 percent, which goes some way to explain why the US is, by far, the world’s biggest importing nation. But most advanced countries also have average tariffs below 5 percent. And China’s (according to the same World Bank source) is also only 3.5 percent. Hence, tariffs alone (at least when they are so low) may not be an explanation of fundamental imbalances in trade.
FACT 3: It’s not just China: the US has run deficits against the rest of the world for decades.
True, the US imports a huge amount from China. But Chinese-made imports (of goods and services) amount to $524 billion out of $2,895 billion imported from all countries, which amounts to 524/2895 = .181, or only 18 percent of total US imports. European imports are somewhat larger. So why single out China? (Answers below.)
For the “rest of the world” as a whole, the US “suffers” a deficit of $566 billion, as seen in Figure 2. In goods (merchandise) alone, the US deficit is an even more sobering: $796 billion (and growing). The one small bright spot is that the US “enjoys” a surplus, against the rest of the world, of $230 billion (and growing) in services, which reduces the overall deficit “suffered” by the US, against the rest of the world, to “only” $566 billion.
Figure 2. US vs. Rest of World: Merchandise and Services Trade (2017)
FACT 4: There are rather few countries where the US runs a surplus.
Most of the nations against which the US runs an overall surplus are small countries, and US surpluses are also rather small, as seen in Table 1.
Table 1. The Few Nations Where the US Has Tiny Trade Surpluses
|Countries||Surplus in $ Billions|
|3||United Arab Emirates||15.7|
|TOTAL OF 15 COUNTRIES||148.3|
Source: US Census Bureau
FACT 5: The US is by far the world’s leading exporter of services.
The US exports more services than it imports from the rest of the world, to the tune of a $230 billion surplus. This number has been growing annually, reflecting the fact that the US is a powerhouse of knowledge and intellectual property with one of the most entrepreneurial “startup” cultures of all nations.
From a comparative advantage perspective, it makes sense for low-end, routine products such as toasters and hand tools to be made in low-wage nations, while the US focuses on its strengths in technology and innovation.
Moreover, trade statistics do not fully capture, or reflect, the US advantage in services. Apple, Inc. is one of the world’s largest companies in terms of market capital value. Compared with a $649 retail value of an iPhone, Apple pays its subcontractor, Foxconn in China, only around $10 to assemble it, with parts shipped to Foxconn plants from Korea, Japan, Germany, and many nations to be assembled in China. Once assembled, Foxconn ships the iPhone to the US at an invoice value of $220 ($210 imported parts value + $10 assembly fee). The $220 gets recorded as a US import from China—even though only $10 of the $220 invoice value was added in China. Meanwhile, the $649 – 220 = $429 gross margin (or retail value minus import cost) enjoyed by Apple appears nowhere in the trade data, even though Apple has exported and reimported its services and technology through its brilliant design of the iPhone’s components and has orchestrated the global supply chain.
Critics could “blame” China and Apple for an import of $220 x 15 million iPhones = $3.3 billion, even though the Chinese value-added component was only $10 x 15 million iPhones = $150 million.
In the 21st century, the world economy (that is to say, of all nations) is slowly transitioning from agriculture to manufacturing, and from manufacturing to services—which bodes well for the US economy in the long run, provided:
(1) US companies continue to be the leaders in R&D and innovation.
(2) Other nations do not capture or “steal” American knowledge as rapidly as US firms generate new technology (more on this below).
FACT 6: There is no denying that China has a principal role in the US merchandise deficit.
As we see from the figures above, in goods or merchandise alone, China accounts for 47 percent of the USA’s trade deficit: $376 billion for China compared with $796 for the world as a whole. Combining goods and services, China accounts for 59 percent of the USA’s overall trade deficit: $337 billion for China compared with $566 for the world as a whole. The overall proportion, or percentage, for China is larger because of the US lead in services exports.
In short, tens of millions of Chinese toil for between $2‒4 per hour on behalf of American consumers, making toasters, knickknacks, furniture, and basic electronics (to give some idea of low-technology products), while a few million Americans work in skilled jobs earning $30 per hour, or more, to produce Boeing aircraft, design the latest iPhone, construct financial packages using advanced math, and also, yes, producing soybeans and pork. (The US farmer riding his/her $600,000 GPS-guided harvester or combine  over his/her 500-acre laser-leveled farm is typically not only a multimillionaire in assets, but also an educated mechanic, biochemist, and financial planner dabbling in agricultural futures, and who is also very knowledgeable in meteorology, among other skills—which explains the US trade success in agricultural exports.)
Thus far, with wages still much below the US, China leads in making basic products such as microwave ovens and garments.
FACT 7: The US trade deficit has been partially financed for four decades by the rest of the world (including China).
A trade deficit simply means that the US imports and consumes more from the rest of the world than it sells to the rest of the world. Every year that this happens, foreigners outside the US end up with net extra dollars in their hands. For example, in Figure 1 reproduced below, Chinese companies sold/earned $524 billion from exports to the US in 2017. What happened to the $524 billion they earned? Some of it was used by the same or other Chinese companies to buy American items from the US: $130 billion in goods + $57 billion in services, or a total of $187 billion imported from the US.
Figure 1 (Repeated). US vs. China: Merchandise and Services Trade (2017)
Even so, that meant that Chinese companies ended up in 2017 with $524 ‒ 187 = $337 billion surplus in their accounts. Some of this surplus was used by the Chinese to buy products from third countries. But even after that, many billions of surplus dollars were left over, unutilized in China, in 2017. The Chinese do not need or use dollars in their country, considering them as only pieces of paper (or electronic entries). The surplus dollars are handed over by Chinese firms to Chinese banks in exchange for their own currency (the RMB, or renminbi yuan). Each year, the surplus dollars then end up in the Chinese Central Bank (the PBOC, or People’s Bank of China).
What does the PBOC do each year with the surplus dollars? To keep them in cash form or electronic cashable entries is pointless. Instead, what the Chinese Central Bank does is very kindly reinvest the annual surplus dollars in US assets—mainly US Treasury securities, pieces of paper that the US government issues as bonds, notes, and bills in exchange for taking in dollars from investors. That way, reinvesting the hundreds of billions of surplus dollars back into the US produces these results:
• The dollar remains strong (instead of the Chinese selling off the billions of dollars in the open foreign exchange market—which would devalue the dollar sharply and make imports from China and elsewhere more expensive).
• The continued strength of the US dollar keeps US consumers happy (and they continue to “enjoy” reasonably well-made Chinese products at low or throwaway prices).
• Tens of millions of jobs within China that depend on the US market continue to be preserved—Chinese export factories continue to churn out a flood of exports.
• With strong buying of, faith in, and demand for US Treasury bonds, US interest rates remain low for the American consumer’s auto loans and mortgages, leaving American household money left over for discretionary purchases, such as Chinese-made TV sets.
• The US government budget, which has also run a deficit for most of the last 35 years, has been partially financed by foreigners like the Chinese. That is to say, over the past 35 years, by issuing pieces of paper called “Treasury Securities – US Bonds, Notes, and Bills” in return for real dollars, the US government has each year spent more than it took in from domestic tax revenue, enabling the US government to continue to fund Social Security, disability, and other expenditures, such as defense. But this has run up a cumulative total of $19 trillion in debt.
Table 2. US Government Debt (End 2017)
Trade deficits the US has run against the rest of the world for 43 years are a direct correlate of the government deficits the US government has also run for most of the past 43 years.
The “game” can continue, as long as three conditions are fulfilled:
• Investors (both foreign and domestic) continue to have faith and give up real current dollars to the US government in return for pieces of paper called Treasury bills and bonds. (Often, the interest rates are so low that in inflation-adjusted terms the real return can be zero or negative. Yet thus far, faith remains in US government debt as a safe haven.)
• Foreign workers continue to toil on behalf of the US consumer for low wages, such as $1–4 per hour.
• Employment in the US remains at high or tolerable levels.
For the most part, with the exception of a few recessions, the above three conditions have prevailed for three to four decades. Faith remains. The game continues.
FACT 8: All policies create “winners” and “losers”: but in international trade, “winners” vastly outnumber “losers.”
I use the terms “winners” and “losers” only as a rhetorical device. Those who have “lost out” in the economic changes in recent times deserve every consideration, respect, and help, because they are our fellow human beings.
Losers: Don Trump rode to the White House in 2016 because of victories in a few key states where the earnings of a disaffected few million US workers in mature industries, such as coal, steel, and aluminum, declined in the past decade because of global competition. Moreover, additional millions of Americans have had flat earnings since the Great Recession of 2008. This is psychologically devastating in a nation where, for over 200 years, the expectation has been that children would be better off than their parents’ generation. Global competition has somewhat dampened that expectation.
Winners: But many millions more Americans are vastly better off today than their parents—in income, assets, health, education, and prospects—compared with, say 1980, when globalization took off around the world. Unemployment in 2017‒2018 was at a record low level of only 4.1%. Retirees and those who consciously opted out of work enjoy the highest level of benefits and health care ever. The average American enjoys the highest after-tax purchasing power in the world. In per capita income, the US ranks 8th out of 193 nations, with small countries like Monaco, Switzerland, Qatar, and Denmark being ranked higher. But this is misleading because of
• Effectively lower taxes in the US than in those nations; and
• Far lower prices, in general, for almost all products because of
– a dynamic, competitive economy where firms compete to keep prices low, and
– low-cost imports.
Effectively, Americans enjoy the highest standard of living in the world, in material terms. In an earlier article I compared the benefit to US consumers of buying imported items with the benefit of purchasing the same items manufactured domestically in the US. Chinese imports alone save American consumers $295 billion in additional costs—or an extra $2,380 per household, per year, in Americans’ pockets.
The benefits of international trade and investment have benefited billions of persons around the world. The World Bank reports that grinding poverty declined from 43 percent of humanity in 1980 to only 9 percent in 2017, despite an increase in world population from 4.5 billion to 7.6 billion humans. An additional 2 to 3 billion have been lifted completely out of poverty into a middle-class existence. This wonderful result is partially due to the tide of globalization.
However, it is true that inequality and disparities have increased in the US, and the country is more psychologically tense and fragmented than other nations, as well as when compared with its own past. The “losers” have become more vocal in expressing their discontent, seething in abandoned coal mines or closed steel plants or in the shadows of gleaming skyscrapers and the high-tech economy that has left many of them abandoned as bewildered bystanders.
The backlash against international trade is not because it has lifted global standards of living, with winners far outnumbering losers in the US and around the world. The “gain” far outweighs the “pain.” Rather, the backlash is because the ethic of hyper-competition that has infected companies, and even governments, has made us neglect the pain felt by the bewildered millions left behind. In the rush toward economic “progress,” enlightened societies need to compassionately devise cushions, safety nets, counseling, and training for those negatively affected.
FACT 9: Dumping is supposed to be “selling below cost”: but in almost all cases, the dumping company is not losing money.
(For more details and an illustrated numerical example, see my October 23, 2018 post, What Is “Dumping”?)
“Dumping” is reviled as a practice in which unscrupulous importers are said to be (a) selling “below cost,” (b) thereby unfairly hurting competing local producers.
But is dumping really selling below cost? No, in most cases it is not. The selling price of the imported item may be set low, but it almost always is above the variable cost of production and distribution. This is true in manufactured goods, and especially true in the knowledge economy.
All multinational companies practice international price differentiation
Most international marketers price the same software, or camera, or washing machine, steel, medicine, aluminum, or whatever item, according to what each nation’s customers can bear, often with enormous price variations. The same college textbook retailing for $225 in the US may be sold for $35 in Thailand—and the publisher still makes an incremental profit because the cost of paying for royalties, printing, and distributing one extra textbook may only be $9.
A bottle of pills costing $100 at a US pharmacy may be sold by the same drug company in India for less than $10. Since the variable cost of manufacturing the bottle of pills is only $2 (not counting the sunk R&D and fixed costs, which may indeed be in the millions), even at $10 the pharmaceutical company is still making an incremental profit in India of $10 – 2 = $8 per bottle. The $100 price at the US pharmacy does not create a $100 – 2 = $98 profit: $100 in the US not only covers the $2 variable cost, but the $98 margin then generously covers the millions spent on R&D and the fixed costs. Only then what is left over may be deemed as profit for the drug company.
In a low-income country, despite a very low price as long as it is above the variable cost floor, the company is making an incremental profit. This assumes that the fixed costs (and R&D amortization) are already covered by higher prices in the company’s domestic and other foreign markets.
It is important to realize that we are not speaking here of counterfeit items or knockoffs. The genuine product made by the multinational company itself (or one of its foreign subsidiaries) is being deliberately sold by the company at dramatically different prices in different nations.
Tide detergent in China is sold for less than one-fifth the US price, to give just one of thousands of such examples from around the world. If a multinational company senses that consumers are willing to pay more in a particular nation, they will set the price much higher—for the same genuine item made by the company or one of its subsidiaries—than in a low-income, price-sensitive country. Global price differentiation is ubiquitous and is a common practice that maximizes the multinational company’s overall global revenue and profits.
Each country, for the most part, is a separate and segmented market, so that a low price in one nation does not generally affect price levels in other nations. What ultimately matters is that across all countries in the world together, all sales revenues cover all costs—not only the variable costs, but also R&D amortization and fixed costs.
Is dumping a situation where unscrupulous importers are said to be selling “below cost”?
Chinese steel and aluminum imports, allegedly dumped according to the Trump Administration, are a recent example. Excess capacity was installed in China (in huge factories, far more than the domestic Chinese market demand required). This was aided by cheap loans and land given by the Chinese central and provincial authorities, driven by a “build it and they will come” mentality. As long as the domestic Chinese market’s fixed costs are covered, and profits are made, the Chinese steel and aluminum producers can then sell in the US market at very low prices, which are likely still above their variable cost floor per ton. The Chinese companies are probably not really losing money.
Is dumping a situation where competing local firms can be hurt?
Yes, in many cases this is so. Low prices because of Chinese imports have hurt US-based steel and aluminum producers in the US, as well as all over the world, who do not have the spare production capacity or access to all country markets and so cannot play the same multicountry price differentiation game.  This has resulted in layoffs and closures in the US and Europe. Pain and hurt indeed.
Benefits and costs of low-priced imports
But let us not forget that this so-called dumping has also resulted in a multibillion-dollar benefit to the US and European economies, so that cars, appliances, machinery, and any product that uses steel or aluminum can be bought at a lower cost. The economy-wide benefits of cheap steel and aluminum in Europe and the US—resulting in cheaper cars, appliances, and machinery for consumers there—likely considerably exceed the pain, suffering, and costs borne by shareholders and workers in the closed steel and aluminum factories.
As is often the case, the economy-wide benefits of international trade are much larger in the aggregate. But the benefits are diffused, hard to measure, and small for each car or appliance buyer. If kitchen aluminum foil costs 50 cents less, or if a toaster is $1 cheaper, or if a car costs $100 less for each buyer because of imported steel or aluminum, each individual customer is unlikely to notice the benefit, even though over the entire population each small individual benefit may add up to hundreds of billions saved. Nor is the consumer enjoying cheaper products likely to say anything to their congressperson or member of parliament. By contrast, because the pain and loss suffered in a handful of steel or aluminum companies is concentrated in a few voting districts, their voices can sometimes be louder and more strident, and have more political impact, compared with the mass of silent consumers.
FACT 10: China is hungry for Western technology and company secrets.
In China, an emerging country that is leveraging itself up from its previous backwardness and poverty into technological capability and affluence, company aspirations and objectives are no different from those of firms in other nations: they would all like to benefit from learning their rivals’ technology and methods.
During the 1780s, English firms that had Arkwright-designed spinning wheels, jennies, and frames succeeded in having the British government pass draconian laws threatening severe punishment to anyone exporting textile machinery, designs, or tools to the United States, which then used manual methods. Despite the threatened punishments, by committing designs to memory or drawing them on small scraps of hidden paper, emigrants leaked the technology to America, which became a strong textiles rival of England by 1794. Samuel Slater was one such emigrant who became rich in the US by leaking British secrets to the Americans, thereby transferring English technology. The English called him a traitor.
Samuel “Slater the Traitor”
For centuries, China itself closely guarded the secret of sericulture, thereby enjoying a world monopoly in silk production until 552 AD, when two Nestorian monks visited China in the name of religion and smuggled silkworms back to Byzantium in hollow walking sticks. For millennia, Chinese tea was a monopoly, with spies regularly trying, but failing, to smuggle tea bushes out of China. It was not until the 1860s that an adventurous Scotsman, Robert Bruce, noticed a plant on the southern slopes of the Indian Himalayas that looked very much like the Chinese bush Camellia sinensis. Today, India and other countries produce multiple quantities of tea compared with China.
Companies and individuals trying to learn or steal their rivals’ secrets is nothing new. However, there is a big difference with regard to China—namely, conscious help for Chinese companies from their government in two respects:
(1) Chinese government regulations that prevent foreign firms from investing and doing business in China without taking on a local Chinese company as a partner, and implicitly or explicitly suggesting that the welcome for the foreign investor will be better if they share their technology with the Chinese partner.
That said, we should quickly add several qualifiers to the above general observation:
a. Over the years, China has pedaled back from many such restrictions and today allows subsidiaries fully owned by foreign multinationals (i.e., without any local Chinese partner) in an increasing number of sectors.
b. European and American companies are not naïve and know how to shelter their deepest secrets from their Chinese partners even while working with them in China.
c. For decades after World War II, the Japanese followed exactly the same regulatory practices, learning Western technology through joint ventures and licensing agreements, leveraging themselves into a cutting-edge position. No American administration appeared to be overly concerned at that time.
d. US and European firms are not static in their R&D. The best defense for a company is to undertake innovations (R&D) in a dynamic way so as to remain a few generations ahead of their rivals or Chinese partners. That way, by the time the local partner learns a technology, the foreign partner is a step or two ahead.
(2) Cyber-espionage is undertaken by most large governments. Here again, there is a difference or asymmetry in favor of China. The US government probably has superior cyber-drilling capabilities. But it is unlikely that the US government has a conscious program to steal commercial secrets to benefit US firms, and US laws would frown upon such behavior, if not prohibit it. By contrast, the Chinese government makes no secret of its nationalist desire to help Chinese companies, to say nothing of the fact that 45 percent of Chinese industry consists of state-owned enterprises (SOEs), anyway.
This is not really a “trade” issue, but the Trump Administration has chosen to include it as part of the overall discussion on the international business relationship with China.
What underlies everything is the notion of comparative advantage—the idea that countries are generally better off when they specialize in producing and exporting what they are good at and importing items that do not offer the country a comparative advantage. A simple analogy would be two neighboring farmers. One farmer has superior knowledge in repairing and maintaining farm machinery, while the other has superior knowledge in plant genetics, fertilizers, and pesticides. Both farmers would be better off trading their expertise with each other instead of trying to handle their own operations independently. It does not matter that one farmer draws more benefit from the other’s knowledge than he offers in the knowledge he shares. There will always be such an inequality or asymmetry in trade. The salient point—the core argument of international trade—is that both farmers will be better off compared with where they were before their trading relationship.
The China-US trading relationship is mutually beneficial despite a seemingly frightening deficit. American firms and consumers enjoy reasonably well-made products and components at far lower prices than would be the case if the items were manufactured in the US. The $187 billion in goods and services the US exports to China support tens of thousands, or perhaps more than one hundred thousand, American jobs. The soberingly high trade deficit of $337 billion is very kindly reinvested by the Chinese in US assets—principally in US Treasury instruments—which keeps the dollar strong and the US consumer happily buying. A corollary effect of the recirculated dollars is to help fund the US government deficit and keep interest rates here low, which also helps to keep American mortgage and auto loan interest rates low.
This is not necessarily goodwill on the part of the Chinese, but self-interest, since this policy keeps US customers happy and buying Chinese products while maintaining export-oriented jobs in China. At the same time, US entrepreneurship, new products and services, and new generations of technology have maintained almost full employment here except in recessionary years. Chinese imports do keep lower-skill wages low in America, which is a negative for the bottom 20 percent of the US workforce. But all in all, it has been a win-win situation for both nations over the last 25 years.
To put the China trade in a larger global perspective, we saw above that imports from China amount to only 18.1 percent of US imports from all countries.
The world has laboriously built up an intricate trading system that results in interdependencies that constrain and cause discomfort. Certainly, as this article shows, there will be “winners” as well as some “losers” within a nation as it opens itself up to more international trade. But the key argument is that, on average, a nation is better off because the benefits that accrue to the winning firms and consumers generally significantly exceed the pain, suffering, and angst borne by the losers.
Averages are cold, heartless statistics, of course. A great society needs to be more heedful about the suffering caused by international trade to certain sections of their population and provide ameliorative relief to those affected, while enjoying the overall benefits of trade that accrue to all within the nation. So, although a nation’s participation in international business will indeed produce gains as well as pains, on the whole, the country will be better off.
NOTE: Also see pertinent 1978 commentary from the late Nobel Prize-winning economist Milton Friedman—his words still resonate today.
 See The World Bank: Tariff rate, applied, weighted mean, all products (%).
 Apple, Inc. does not divulge this proprietary data. However, piecing together leaked information from various sources, one can put together an overall rough picture.
 The business press does readers a disservice in not routinely including services (a large and growing component of world trade) in their reporting on world trade. This often distorts the overall picture and confuses readers and politicians.
 Higher demand for a bond raises its price, which reduces the effective interest rate earned from the bond. With very high demand, government bonds can become so pricey that the interest rate can even become zero or fall into the negative zone on an inflation-adjusted basis. Yet some investors will still buy the bond as a “safe haven,” for sheer speculation, or for governments like China in order to keep jobs in China and exports flowing out to the US consumer.
 Hillary Clinton received almost 3 million more votes than did Trump. However, the state-by-state US electoral college system sometimes gives the presidency to the other candidate. Trump won big in states most affected by global competition.
 See, for example: Bernanke, B. and Olson, P. (2016). Are Americans better off than they were a decade or two ago? The Brookings Institution (October 19). Also see: Shapiro, B. (2017). The myth of the stagnating middle class. National Review (January 18).
 A 4 percent unemployment statistic is considered the minimum possible, or tantamount to a full-employment economy, because even with great demand for workers approximately 4 percent will be temporarily traveling between jobs.
 Contractor, F.J. (2017). Disrupting US-China relations will incur high costs. Yale Global (February 28). For more detail, see: Contractor, F.J. (2017). What’s at stake in China-US relations? An estimate of jobs and money involved in the bilateral economic tie. GlobalBusiness.blog (March 10).
 This is a reasonable assumption in many cases, although sometimes a “gray market” may emerge where unauthorized third parties buy the item in a low-price nation then transfer it to the high-price nation to make a profit, thereby undercutting the company’s own profit margins and distribution network in the high-price nation. Generally, the gray market is not a significant problem for multinational companies.
 China dismay as Trump signs off steel, aluminum tariffs. DW.com, September 3, 2018.
 China being a relatively closed market that foreign firms cannot enter, US and European companies simply cannot play the same game in China in order to neutralize the Chinese rivals’ multi-country price discrimination advantage.
 Contractor, F.J. (2011). How a soothing drink changed fortunes and incited protests. Yale Global (March 9).
 Contractor, F.J. (2015). Chinese cyber-espionage on US companies: The asymmetry in the analogy of the “pot calling the kettle black.” Globalbusiness.me (September 28).