How US politicians are mangling the economic debate over decoupling from China
- Targeting China won’t solve the US trade deficit, which ballooned because of America’s own macroeconomic woes
- And arguing for ‘de-risking’ instead of decoupling makes no difference to the deleterious effects of shifting trade away from China
A careful look at the numbers offers a more nuanced assessment. Yes, bilateral trade – exports and imports of goods and services, combined – hit a record US$760.9 billion last year. But gross domestic product and most of its major components also broke records.
Scaling cross-border trade against GDP is a more accurate measure of how trade with China drives the US economy. On that basis, the US-China trade in goods and services was 3 per cent of US GDP last year, down from the peak of 3.7 per cent in 2014. While this is a far cry from full decoupling – which would imply a US-China trade-to-GDP ratio closer to zero – it certainly qualifies as a meaningful step in that direction.
As I have repeated ad nauseam, this is an unfortunate but natural outgrowth of an extraordinary shortfall in US domestic savings. America’s net domestic savings rate fell to -1.2 per cent of national income in the first quarter this year, the weakest reading since the 2008 global financial crisis and far short of the 7.6 per cent average from 1960 to 2000. Consequently, lacking in savings and wanting to invest and grow, the United States has had to run massive balance-of-payments and multilateral trade deficits to attract foreign capital.
That’s where the decoupling tale takes an especially ominous twist. China’s share of the US merchandise trade deficit, while still the largest of any country, has shrunk since the onset of the trade war, falling from 47 per cent in 2018 to 32 per cent last year. Over the same period, the collective share of six other countries – Canada, Mexico, India, South Korea, Taiwan, and Ireland – has risen from 24 per cent to 36 per cent.
Such a trade diversion is hardly a surprise. It is a given for any savings-short economy that imposes tariffs and/or sanctions on a major trading partner.
The trade diversion from China is especially insidious because it shifts the deficit from a low-cost provider of imported goods to higher-cost producers. That is one reason most economists scream that protectionism is ultimately a tax on domestic companies and consumers.
Those cries have evidently fallen on deaf ears in Washington. But the fact remains that squeezing China is basically the political equivalent of rearranging the deck chairs on the Titanic.
Yellen, a first-rate economist, knows all this. In one sense, she was correct when she said, in an exchange after her testimony before the House Financial Services Committee on June 13, that it would be disastrous “to attempt to decouple from China. De-risk? Yes. Decouple? Absolutely not”. Alas, this is a false dichotomy. A complete decoupling is a straw man. The reality is far more incremental.
Benjamin Franklin a liberal example to US officials in China
While that argument is debatable, the numbers are not. The footprint of decoupling is evident in the shifting composition of the US trade deficit away from China and the disentangling of China-centric supply chains that such a trade diversion implies. Whatever you call it – de-risking or incremental steps on the road to decoupling – there is no escaping the deleterious effects on the US economy. Once again, US politicians are doing their best to obfuscate reality and change the subject.