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Trump's demand that China cut its US trade deficit by $200 billion defies the laws of economics

  • President Donald Trump's demand that China cut its trade deficit with the U.S. by $200 billion in two years is tall order politically.
  • It also defies the laws of economics.
  • Even if China decided to buy that much more from U.S. farmers and manufacturers, it would be all but impossible for U.S. companies to fill those orders.
Container ships are positioned under cranes at the Port of Oakland, California.
Getty Images
Container ships are positioned under cranes at the Port of Oakland, California.

President Donald Trump's demand that China cut its trade deficit with the U.S. by $200 billion in two years is tall order politically.

It also defies the laws of economics.

On Tuesday, the president walked back comments over the weekend from Treasury Secretary Steven Mnuchin essentially calling a "truce" in the emerging trade war with China. The administration has threatened to impose steep tariffs on Chinese goods entering the U.S. unless Beijing engineers a $200 billion reduction in its trade surplus with the U.S. by 2020.

"Last year, we lost $500 billion on trade with China," Trump said, erroneously, at a March 23 news conference. "We can't let that happen."

To begin with, Trump's math is off - by more than $100 billion.

Last year, the U.S. imported roughly $505 billion in Chinese goods (including cellphones, computers, shoes and kitchen appliances) and shipped about $130 billion back (with big orders for airplanes and soybeans), a difference of about $375 billion.

A country's trade balance is nothing more or less than the difference between the value of everything it imports from a trade partner and everything it exports back to that country. A trade deficit occurs when the value of imports is greater than the value of exports, in terms of both goods and services.

It's not at all clear that the trade deficit has harmed the U.S. economy, which is enjoying one of its longest expansions in history.

Trump also conveniently ignores a widening trade advantage the U.S. enjoys with China in services, which includes everything from travel to banking.

When a Chinese family travels to Disneyland on an American airline, or a Chinese student pays tuition to an American university, that adds to the trade surplus for the U.S. Last year, the U.S. services trade balance with China widened to $36.8 billion.

But the Trump administration insists that China must take steps to slash its trade surplus in goods by 2020. Even in the unlikely event that Chinese officials agreed to such a massive shift in trade policy, it would be all but impossible to shrink their trade surplus by $200 billion in just two years.

The only way to make that happen would be to reduce U.S. imports from China by that amount, or increase U.S. exports to China – or a combination of the two.

China has little control over U.S. demand for its products and services, which included more than $70 billion in cell phone shipments alone. If the U.S. imposed tariffs on Chinese products, it's not clear whether consumers would buy fewer cellphones. But they would certainly pay more.

Shifting the other side of the equation - which means boosting U.S. exports by $200 million a year - would be even more problematic.

"Even if we sell them every last soybean we own or produce, its only going to make up a small portion of that $200 billion," Stefan Selig, an investment banker at Bridgepark Advisors, told CNBC.

The same holds true for U.S. made Boeing airplanes or Ford trucks. Even if China decided to buy $200 million worth of goods from U.S. manufacturers, with the U.S. unemployment rate now below 4 percent, it would be all but impossible to find enough skilled workers to fill those orders.

And despite Trump's insistence, the U.S. didn't "lose" $375 billion to China. In return for that money, American consumers and businesses received products that were worth that much more, collectively, than all the goods China received from the U.S.

That's why most economists look at a wider measure of the economic ties between countries, known as the current account, which includes income from abroad and other capital transfers. When an American company earns profits on a overseas operation, for example, that money is included in the current account balance.

"What really matters is that China's current-account surplus has been falling since 2008, and now stands at a relatively small 1 percent of GDP," according Jeffrey Frankel, an economist at Harvard University's Kennedy School of Government.

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