10 questions about America’s trade deficit. Oh woe, the trade deficit is (too high?, too low?, too just right?)

Oh woe, the trade deficit is (too high?, too low?, too just right?)

Here are excerpts from an article in “the balance.com,” that will help you come to a conclusion.

US Trade Deficit With China and Why It’s So High
The Real Reason American Jobs Are Going to China

The U.S. trade deficit with China was $419 billion in 2018. The trade deficit exists because U.S. exports to China were only $120 billion while imports from China were $540 billion.

The biggest categories of U.S. imports from China were computers and accessories, cell phones, and apparel and footwear.

A lot of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.

Let’s say you market cell phones under your brand name.

You buy the phones from a Chinese manufacturer for $200 each. You apply your brand name and wholesale the phones for $300 each, after which they retail for $500 each.

This process involves a $200 per phone, U.S. trade deficit with China

If the phones had been 100% American made, they would have cost you $300, and you would have had to wholesale them in America for $450 each, after which they would have cost American consumers $750 each.

We’ll lead off with the ten questions. At the end of the article, we’ll discuss the answers.

Question #1: Is this trade deficit a good thing or a bad thing for America as a nation and for Americans as consumers?

Here is more from the article:

China’s biggest imports from America are commercial aircraft, soybeans, and autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods.

Questions #2 & #3: Who pays for the tariffs on Chinese steel and other goods? Who pays for the cancelation of China’s soybean imports?

Since 2012, the U.S. trade deficit with China has increased. It was $315 billion in 2012, rose to $367.3 billion in 2015, then fell to $346.9 billion in 2015. In just two years, it’s increased to $419.2 billion.

Question #4: Who pays for a trade deficit?

China can produce many consumer goods at lower costs than other countries can. Americans, of course, want these goods for the lowest prices.

How does China keep prices so low? Most economists agree that China’s competitive pricing is a result of two factors:

–A lower standard of living, which allows companies in China to pay lower wages to workers.

–An exchange rate that is partially fixed to the dollar.

Question #5: Who pays for a lower standard of living? 

China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to support it.

Question #6: Who pays for a stronger (higher value) dollar?

China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest.

As of April 2019, the U.S. debt to China was $1.1 trillion. That’s 27% of the total public debt owned by foreign countries.

Question #7: Why does lending to the U.S. strengthen the U.S. dollar?

Many are concerned that this gives China political leverage over U.S. fiscal policy. They worry about what would happen if China started selling its Treasury holdings.

It would also be disastrous if China merely cut back on its Treasury purchases.

Why are they so worried? By buying Treasurys, China helped keep U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise.

That could throw the United States into a recession. But this wouldn’t be in China’s best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying almost as many Treasurys as ever.

Question #8: Why does China’s purchase of Treasury securities reduce interest rates?

U.S. companies that can’t compete with cheap Chinese goods must either lower their costs or go out of business.

Many businesses reduce their costs by outsourcing jobs to China or India. Outsourcing adds to U.S. unemployment. Other industries have just dried up.

U.S. manufacturing, as measured by the number of jobs, declined 34% between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace.

Question #9: Why is a decline in manufacturing a concern?

President Trump promised to lower the trade deficit with China.

On March 1, 2018, he announced he would impose a 25% tariff on steel imports and a 10% tariff on aluminum. On July 6, 2018, Trump’s tariffs went into effect for $34 billion of Chinese imports. China canceled all import contracts for soybeans.

Trump’s tariffs have raised the costs of imported steel, most of which is from China. Trump’s move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines.

China has become a global leader in solar panel production. The tariffs depressed the stock market when they were announced.

Trump also asked China to do more to raise its currency. He claims that China artificially undervalues the yuan by 15% to 40%.

That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People’s Bank of China to strengthen the yuan’s value against the dollar.

It increased by 2% to 3% annually between 2000 and 2013. Former U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration. The Trump administration continued the talks until they stalled in July 2017.

The dollar strengthened 25% between 2013 and 2015. It took the Chinese yuan up with it. China had to lower costs even more to compete with Southeast Asian companies.

The PBOC tried unpegging the yuan from the dollar in 2015. The yuan immediately plummeted. That indicated that the yuan was overvalued. If the yuan were undervalued, as Trump claims, it would have risen instead.

Question #10: Is Donald Trump clueless about international trade?


Image result for ANSWERS

Question #1: Is this trade deficit beneficial or detrimental for America as a nation and for Americans as consumers?

Our “trade deficit,” as the term is used, means that America sends more dollars to foreign countries than they send to us.

One of life’s enduring mysteries is why this even exchange is known as a “deficit.” It just as well could be called a “surplus” because the foreign countries send us more goods and services than we send them.

The United States is Monetarily Sovereign. It creates dollars at will.

Fed Chairman Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Fed Chairman Alan Greenspan: “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. A government cannot become insolvent with respect to obligations in its own currency.”

St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e.,unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.

But the United States has only a limited supply of goods and services.

Something you can create at will and at no cost (dollars) is not as valuable as something that is in limited supply (goods and services). To America, dollars are much less valuable than are goods and services.

Therefore, from the standpoint of America as a nation, the so-called trade “deficit” actually is a trade “surplus,” and is beneficial for America.

From the standpoint of American consumers,  the trade “deficit” means Americans have money, and are able to use that money to obtain desired goods and services from other nations. This is a good thing.

Every time you walk into a store and buy something, you run what the economists might call a “trade deficit” with the store. Yet no one suggests that running a “deficit” with a store is detrimental to a consumer.

Questions #2 & #3: Who pays for the tariffs on Chinese steel and other goods? Who pays for the cancelation of China’s soybean imports?

Tariffs are taxes levied on the buyers. The tariffs on Chines steel and other goods are paid by U.S. consumers, and these tariff dollars are sent to the U.S. Treasury, where they are destroyed. (“Does the U.S. Treasury really destroy your tax dollars?“)

Like all U.S. taxes, U.S. tariffs take growth dollars out of the American economy and therefore are recessionary. Trump’s tariffs take money from your pockets.

And China’s cancellation of soybean imports hurts American soybean farmers.

Question #4: Who pays for a trade deficit?

A trade “deficit” reflects an even exchange between dollars vs. goods and services. As discussed in #1, the so-called trade-deficit actually is a trade surplus, that is beneficial to America.

Question #5: Who pays for a lower standard of living? 

The poor. No matter how low a nation’s standard of living may be, the rich always have a high standard of living.

If, to achieve a trade “surplus,” a nation cuts wages, the working poor and the average standard of living will suffer.

Question #6: Who pays for a stronger (higher value) dollar?

Americans, who buy foreign goods, benefit from a higher value dollar. To some degree, every American buys foreign goods, much of which are part of the contents of the goods we buy.

Thus, despite the stock market’s immediate negative reaction to higher interest rates, higher rates strengthen the dollar and fight inflation by making imports cheaper in dollars.

Higher interest rates also are beneficial also because they force the federal government to pay more growth dollars into the economy, when paying interest on Treasury securities.

On balance, higher interest rates benefit the economy and consumers.

Question #8: Why does China’s purchase of Treasury securities reduce interest rates?

The common belief is that the U.S. must sell a certain amount of T-securities, and if China didn’t buy, then the government would have to raise rates in order to entice other people to buy.

In fact, being Monetarily Sovereign, the federal government has absolute control over everything related to the dollar, including interest rates.

Further, it is not forced to sell any amount of T-securities. If the government wished, it could stop accepting deposits into T-security accounts at any time.

Thus, it would not “be disastrous if China merely cut back on its Treasury purchases,” as the article’s author claimed.

Dollars were a creation of the U.S. government laws. The U.S. government is not permanently bound by the laws it alone creates.

Interest rates are what the government wishes them to be, as the Fed demonstrates every day.

Question #9: Why is a decline in manufacturing a concern?

It is a concern only to those who hold the outdated belief that the American economy relies on manufacturing.

While manufacturing employment has declined, employment in non-manufacturing industries has grown.

Today, unemployment is at historic lows, demonstrating the declining importance of the manufacturing sector.

Question #10: Is Donald Trump clueless about international trade?

Without a doubt. His pressure on the Federal Reserve to lower interest rates, and his trade wars, are ample proof of his ineptness.

He continually needs someone to blame for something — anything — to deflect any blame from himself, so he wrongly blames the Fed for less than impressive economic growth.

Business hates uncertainty.

The rapid turnover in Trump’s administration, plus his erratic flip-flopping on issues, plus his character attacks, plus his trade wars, plus his sudden and arbitrary withdrawals from international agreements, plus his nativist bigotry, all contribute to an adverse business climate.

Answer to the big question: The so-called “trade deficit” is a benefit to the United States.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereigntyFacebook: Rodger Malcolm Mitchell


The most important problems in economics involve the excessive income/wealth/power Gaps between the richer and the poorer.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.


23 thoughts on “10 questions about America’s trade deficit. Oh woe, the trade deficit is (too high?, too low?, too just right?)

  1. News Report:

    “President Donald Trump, since last year, has slapped 25 percent duties on $250 billion worth of Chinese imports and threatened additional levies on all other Chinese items coming to the United States.”

    Translation: President Donald Trump, since last year, has charged American taxpayers $62.5 Billion for Chinese imports and threatened to charge American taxpayers even more billions.


  2. Confusion over accounting terms is something few understand. Here’s another one; You say the Federal government both has and doesn’t have dollars. For me the only time it has dollars is when it creates them, and debts only in the interval between sending the invoice and getting the bill paid, usually 30 days. What is it you mean?


    1. You’re right.
      I also should mention that there is a time when the federal government actually does have dollars. It’s the relatively small amount of money in the general fund account at the Federal Reserve Bank.
      But fundamentally, you are correct.


      1. Indeed, a good riddle is “when does zero equal infinity?” The answer, of course, is how many dollars the federal government owns at any given time.

        Monetary Sovereignty is so simple, a child can understand it. Yet apparently it is too complex for the self-proclaimed technocratic “experts” of economics to wrap their minds around, though most of them are simply being disingenuous rather than ignorant.


  3. I agree with most of this article and I consider you to be one of the most progressive people I ever encountered, Rodger. However, some purists may criticize this particular article as coming dangerously close to neoliberalism. What would be your response to these critics?

    Also, one should note that interest rates, as well as currency exchange rates, are a razor-sharp, double-edged sword. There is such a thing as too strong a currency and/or too high an interest rate, after all. I don’t know exactly where that point is, and likely varies a lot, but it does exist nonetheless. Too high interest rates effectively slows down the velocity of money too much, and that impairs the circulation in the economy. And while good at quashing demand-pull inflation in the short term, too high for too long can lead to more cost-push inflation in the long run as well, as Canada and the UK learned the hard way in the 1980s during their misguided quest for the holy grail of zero inflation. Loosening monetary policy (i.e. cutting rates) in the 1990s, on the other hand, was apparently enough to mask the otherwise deleterious effects of fiscal austerity in Canada, given how overvalued their currency apparently was relative to the US dollar in the 1980s and early 1990s.


    1. Confusingly to most people is the fact that “neoliberalism” essentially is today’s conservativism. I doubt that describes “one of the most progressive people you ever encountered.”

      There can be too much of anything. At any level, interest benefits some and hurts others. Years ago, I owned bank CDs paying 12%. Loved them.


      1. Indeed, the confusing and nebulous term “neoliberalism” is likely of British English origin, since over there “liberal” generally means “laissez-faire” or “free market rather than leftist. Neoliberalism’s platform includes free trade, deregulation, austerity, union-busting, privileging capital over labor in every way, commodification of virtually everything, and ultimately corporate oligarchy. With a vengeance. Rob from the poor, give to the rich, and torpedo the middle class, basically. Only the first plank of their platform, free trade, would be where any purist of the left would take issue with your article.

        Today, both Republicans and most Democrats are neoliberals to one degree or another, effectively two right wings. New Democrats (like Nu Labour in the UK), however, do it all with a smile and a veneer of pseudo-progressivism.


          1. BINGO. The phony pseudo-left that is the New Democrats (and Nu Labour as well) are simply one of the two right wings of the USA (and UK as well). And indeed MS is the perfect antidote to such a toxic ideology.


          2. Neo liberalism is a manifesto of Predatory Capitalism. The US economy has been predatory since 1945 [it was in the 1800’s too but did it at “home”] Now all nations have to beware. Paul Craig Roberts describes Capitalism as a plunder mechanism that generates short term profits by externalising long term costs. It exhausts natural resources for profit while imposing costs such as pollution in the environment. The US is losing ground on that, but it’s barely started paying for its reach.

            Liked by 1 person

      2. As for interest rates, we should also keep in mind that in the current age of secular stagnation, the “natural” or “neutral” rate of interest is significantly lower than it was in the past. Of course, if all or even just a few (particularly the first three) of the Ten Steps to Prosperity were implemented, such secular stagnation would be over and done with rather quickly.

        For those readers who don’t know what “secular stagnation” is, there are several definitions, but think the Economic Policy Institute’s definition is the best one: “a chronic shortage of aggregate demand constraining economic growth”. Which makes sense, since the formula for aggregate demand is identical to the formula for nominal GDP:

        GDP = AD = Consumer Spending + Government Spending + Investment + Net Exports

        Which can be further simplified to:

        GDP = AD = Federal Spending + Nonfederal Spending + Net Exports

        And given that federal spending and consumer spending (which is also spurred by federal transfer payments) combined total to about 90% of GDP, we can see how simple it is to mathematically increase GDP with the stroke of a keyboard: more federal spending.


          1. The “natural” (or “neutral”) rate of interest is defined as the rate above which slows down the econony and below which accelerates the economy, at least in theory. And it has always been a moving target, and may actually be more like a range rather than a specific number.


          2. It’s not a moving target. It’s a myth that assumes higher interest rates are economically depressive and lower rates are stimulative.
            But we already know that the Fed increases rates to reduce inflation.
            So that would require:
            Lower interest rates = increased inflation = increased GDP

            I don’t see that effect: https://fred.stlouisfed.org/graph/fredgraph.png?g=osRP

            I see hints of that effect before 1985 and the opposite effect after 1985


          3. The Fed seems to say there is a magical rate of interest that will both
            1. Cause inflation to be zero and
            2. Cause employment to be “full.”

            Total bullshit. Interest rates are just one (and a minor one, at that) factor that influences inflation and employment.

            It’s like claiming that the mowed height of the outfield grass determines the final score of a baseball game. It’s a factor, but a minor one.


          4. From an economist point of view, natural rate of interest is the theoretical interest rate that keeps prices stable, i.e. it creates neither inflation nor deflation. Ideally it is the equilibrium interest rate that ensures savings = investment, such that future output grows just enough to meet future consumption (since savings is fundamentally a future deferment of consumption).


    2. Running large trade deficits is neither neoliberal nor progressive. What can be classified as neoliberal or progressive is the government’s policy response to trade deficits.

      Trade deficits are an economic benefit and trade surpluses are an economic cost. When we export, we expend valuable resources to produce finished goods and services that we then send out of our economy in exchange for our own sovereign currency, for which we have an unlimited supply. When we import, we instead get finished goods and services from someone else’s hard labor in exchange for that same currency. The fact that we might get persistent high unemployment in some sectors is largely a failure of policy, or lack of policy, not of trade deficits per se.

      From a policy standpoint, we could protect employment by suppressing wages and standard of living to increase exports, or we could raise tariffs on the imported products to make our products more competitive and increase costs and inflation, which also lowers standard of living. Neither solution is particularly progressive.

      However, government could also use its sovereign spending power to redirect resources from making cheap clothes and consumer goods to more higher value added products and services such as sustainable energy, infrastructure, education, health care, etc. In fact one could argue that large trade deficits actually frees up valuable resources to pursue lofty progressive causes such as the Green New Deal.


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