Tax Reform And Trump's Chinese Trade Deficit Conundrum

Authored by MN Gordon via EconomicPrism.com,

Most things come easier said than done.  Take President Trump’s posture on trade with China...

https://www.zerohedge.com/sites/default/files/inline-images/20180118_mng.png

Trump doesn’t want a bigger trade deficit with China.  He wants a smaller trade deficit with China.  In fact, reducing the trade deficit with China is one of Trump’s promises to Make America Great Again.  In May 2016, he even told a campaign crowd:

“We can’t continue to allow China to rape our country and that’s what they’re doing.  It’s the greatest theft in the history of the world.”

Yet as Trump approaches the conclusion of his first year in office, he’s achieved the exact opposite of what he said.  The trade deficit with China hasn’t gotten smaller.  It has gotten bigger.  Actually, it has gotten a lot bigger.

For example, the U.S. trade deficit with China from January through November 2017 was approximately $342 billion.  Over this same period in 2016, the trade deficit with China was $317.4 billion.  This amounts to a 7.7 percent widening of the U.S. trade deficit with China that has occurred on Trump’s watch.

What gives?  Is China better at manipulating its currency than the U.S.?  Does China somehow outplay the U.S. when it comes to both trade strategy and strategery?

Certainly, The Donald will get to the bottom of it…

Unintended Consequences

Earlier this week President Trump called up Chinese President Xi Jinping to have a frank phone conversation on the matter.  From what we gather, Trump “expressed disappointment that the United States’ trade deficit has continued to grow.”

We don’t know what Jinping said in response.  But what he could’ve said was, “Donald, you ain’t seen nothin’ yet!”

One of the unintended consequences of increasing the budget deficit to pay for the GOP tax reform bill is that it also increases the trade deficit.  In other words, the budget imbalance between taxes and government expenditures has a direct impact on foreign trade imbalances.  In an article published in Asia & the Pacific Policy Studies, economist Ralph W. Huenemann explains:

“In 2016, the American government budgets carried a fiscal deficit of $865 billion, and the balance of payments showed a trade deficit of $521 billion.  A surplus of private savings (including substantial retained corporate profits) of about $344 billion over investment partially offset the budget deficit, but as long as there is such a massive deficit on government budgets, the net inflow of imports will continue.  This is inherent in the nature of national income.  No President, Donald Trump or any other, can change this reality without tackling the government budget deficit.

So if Trump doesn’t want a trade deficit with China then he needs to reduce the government’s budget deficit.  However, reducing the government’s budget deficit is near impossible under the new GOP tax reform bill.  Hence, President Trump is left with a weak hand of bluster.

Tax Reform and Trump’s Chinese Trade Deficit Conundrum

This week Reuters released parts of its exclusive interview with President Trump.  On the prospect of a trade war with China, Trump remarked that he hopes a trade war won’t ensue, “But if there is, there is.”

Trump also commented that any change in China’s purchases of U.S. Treasuries would not hurt the U.S. economy.  This is because, according to Trump, “everybody wants to buy Treasuries.”

Let’s hope Trump knows what he’s talking about.  At the moment, China and Japan account for one-third of all foreign-held Treasuries.  However, China has currently tapered back its Treasury holdings to a four month low.  And Japan has reduced its Treasury holdings to a four year low.

But maybe Trump’s right.  Maybe China and Japan don’t matter.  Maybe someone else – like the Swiss National Bank – will pick up the slack that’s needed to finance Trump’s deficit.

Still, what would this get him?  It wouldn’t address his trade deficit conundrum; rather, it would make it worse.

The point is attempting to spend a nation to prosperity using borrowed money is not without consequences.  In the short run, an illusion of wealth can be erected.  In the long run, the illusion slips into decay and disrepair at the precise moment the bill comes due.

This is one of the tradeoffs of deficit spending based government stimulus that politicians fail to mention when promising free lunches.  Any economic boost that deficit financed tax reform delivers will be short-lived.

Quite frankly, such a contrived economic boost is akin to burning one’s furniture to stay warm.  The heat it produces feels good while it lasts.  But once the furniture’s all burned up, it’s game over.

Comments

Stuck on Zero Endgame Napoleon Sat, 01/20/2018 - 09:32 Permalink

The article is as stupid and unsupportable as any I've read in ZH.  Trade imbalances are fueling government deficits. Every billion dollars that goes overseas means another billion or more in government deficits. When a factory moves to China those thousands of workers go on the government welfare dole and no more taxes are collected. Crimes increases, social problems, etc. etc.

In reply to by Endgame Napoleon

TeethVillage88s Endgame Napoleon Sat, 01/20/2018 - 17:00 Permalink

Trade Policy?

 

What does it mean to promulgate a new protectionist trade policy to last for the next 10-20 years?

 

Good Question!  National Discussion.  National Education.  Discovery of Truth on National Scale, in all 50 States.  Leadership over all US Educational Institutions.  Chipping away at corruption in all US Institutions.  Investigations.  Auditing.  Accounting.  Support of GAO.  Winning the Hearts & Minds of US Citizens and even Illegals.  Convincing the Wealthy Lobbyist.  This is like a revolution.

 

Remember the Equal Rights Amendment campaign in the USA?  Something like that... but all about economics, trade, currency, and bread winner jobs & how we lost Economic power & worker freedoms.

 

I'm just saying... lol  NO, I AM Telling the story.  MSM & Democrats abandoned US workers, US Families, US Middle Class, & US Revolution.  Fuck you CNN, Fox, ABC, CBS, NBC, CNBC, Bloomberg, NYT, USAToday

 

- TeethVillage88s, Journalist Extraordinaire, GAO Inspector 

In reply to by Endgame Napoleon

philipat HRClinton Fri, 01/19/2018 - 21:15 Permalink

Blaming China is just shooting the messenger. The NWO/Globalization is the root cause not China, which is just a beneficiary. Not even the MAIN beneficiary which is, of course, US MNC's who offshored their production and play IP games to keep the profits offshore in tax havens. China's take in all the MNC production is actually peanuts; essentially just employment and a small add-on for contract manufacturing on behalf of US MNC's.

In reply to by HRClinton

new game philipat Sat, 01/20/2018 - 07:47 Permalink

just like the petro dolla, the chinese need dollas too. so they park in tresuries. but alas, less and less as they are developing alternative trade as the sun rises in the east. this is way over our leaders heads. they are in lala land of merica the great. keynsian trump is econ dumbed by advisors that are promoting these un or intended consequences.

almost a guarantee that merica will do the wrong actions dealing with china as we are witnessing. embracing free trade with a fx component of unpegging the manipulation of currency is the answer. a fx tariff will wake them the fuk up...

In reply to by philipat

Endgame Napoleon philipat Sat, 01/20/2018 - 08:52 Permalink

They sure have managed to finance a lot of building up of their country, their military and their much-ballyhooed middle class since Nixon opened trade with China, with Bill Clinton serving China even more by granting Most Favored Nation trading status.

Less than a decade after the Tiananmen Square massacre of innocent students, which Americans saw on TV, Clinton greased the wheels for more trade with China and more offshoring of millions of American jobs to China.

Since the US applies very different human rights standards when dealing with many countries, it lets you know that the cheap labor in China—30-cent-per-hour labor for many years—came first and is very important to economic elites, regardless of what they say about it.

A few Americans and a few Chinese could make piles of money off of that near-slave labor, which has gone up in price, hence the American manufacturers leaving for places like Vietnam. The first place American manufacturers left was the USA, with its then giant middle class. They went from the unionized Northern states, with their high wages, to the American South, where they could pay minimum wage.

That minimum-wage labor became too expensive, causing an exodus of US manufacturers to Mexico, where they could pay $1 per hour. Then $1-per-hour failed to keep the owners in enough jets to do their globe trotting, and so, it was off to the 30-cent-per-hour labor in China.

Meanwhile, Americans were being told by marketers, lobbyist-bought politicians and a corporate-owned media how cheap these foreign-made products were, as their rent started eating more than half of their monthly pay, reducing the value of the small cost savings on plastic items, clothing, electronics, toys and particle-board furniture with plastic veneer.

Sold at big-box stores that decimated most Main Street stores, these items need to be replaced frequently due to poor construction in most cases, nullifying the small reduction in price unless you bought it on the clearance rack.

Many Americans shop that way—all clearance rack so that small merchants cannot make a profit. I have talked to a lot of small retailers, some with stores so well known and in posh areas that they were featured in the newspaper when finally giving up the good fight, saying this or that nationally known peddler of Chinese-made goods and their clearance rack finally put them out of business after decades.

These behemoth retailers can make money off a small margin and volume discounts, selling in bulk at any price, but it has killed off tons of small businesses.

Unless you are the manager, those big retailers do not offer many jobs that pay enough to cover your rent, either. It is hard to have a small business or to work for these large-scale retailers unless you have unearned income from spouse or from government for womb productivity, covering your major household bills.

It is getting harder and harder to convince Americans that this a [win] for most of us. 

In reply to by philipat

djrichard Fri, 01/19/2018 - 20:54 Permalink

We didn't have trade imbalances with the rest of the world until we went off the gold inter-exchange standard in 1971.  Has nothing to do with the Federal Debt.

Mental check: if what China says is true, and increased deficits lead to increased trade deficits, does that mean China is accumulating more treasuries?  Doesn't look like it.   Rather, China's accumulation of treasuries is a function of how much repatriation of US currency by China is not going into other things in the US: equity, private debt, real-estate.  Anything to avoid repatriating the US currency into goods and services from the US.

DeathMerchant Fri, 01/19/2018 - 20:56 Permalink

Quit buying Chinese shit, even if it hurts at first. Politicians can't be serious when everything they see is made in China and then complain about the trade deficit. Stop the fucking welfare, EBT and food stamp programs and make these people work or starve. Fire the factories up and make the same junk the chinks are making.

LetThemEatRand Fri, 01/19/2018 - 20:58 Permalink

The people who benefit from the status quo deficit spending (MIC, all three letter agencies, the massive federal government apparatus, bankers) and trade imbalance (global corporations, bankers) are going to ride this horse until it dies.   The American middle class is the horse.

JibjeResearch Fri, 01/19/2018 - 21:21 Permalink

People with lots of money will Not suffer much, so go make money because pain is coming and there's no avoidance ...

What's coming?

1. $1 trillion plus of USD coming home from oversea if Trump (have his way, I doubt it) push hard with trade war. 

So basically this will ensure that the Fed will raise rate but not enough to have a market crash.  The inflation comes and the poor will have a hard time buying the basic stuffs: food, med, and shelter. 

2. The European Nations warm up and accept Belt Road Initiative.

So this one gives China a life line when the US starts a trade war.  Resources will flow into China and product/services go to the rest of the world.  The European Nations will fight hard for a fair trade, and I think China will give it for many reasons, but one big reason is to isolate the USA.  This will create a China world economy where all nations surrounding China want a piece of China's economy.  If the trade is about equal, then all nations win except the USA.

3. China gets the Gold/Oil/Yuan reserve status and print the Yuan until it's dead.

So this is just like the PetroDollar which allows the USA to print and create a huge bond market.  China will print and creates a huge Yuan bond market. 

4. Automation to compete with China/the world.

This is a tricky one.  Depending on the who is the President, we can see half-hearted or full blown automation to compete with China/EU.  We could see mass unemployment and large amount of freeshit handed out by the Fed/Gov.

 

So yeah, reserve your energy for hardship.  It's coming.

And, a war ensures that the degree of suffering will be higher.

MuffDiver69 Fri, 01/19/2018 - 22:10 Permalink

The tax reform takes 150 billion in revenue a year out of current budget over ten years at something like 2.2% growth and Apple alone will pay up 38 billion to repatriate. This writer must think 2% growth is the standard. 3% growth and I believe it will be closer to 4% will make the revenue moot, but who the hell doesn’t know we have structural debt and the democrats in particular could give a f$ck..

Fireman Sat, 01/20/2018 - 05:54 Permalink

“We can’t continue to allow China to rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world.” Cognitive di$$onance if ever there was a case of this sickness...USSA is it.

 

Without China's Peoples' Walmart feeding stations distributing stuff to the underclass which they get for "Treasury" bond toilet paper, in other words for free, USSANS would be eating each other as its war machine grinds the Middle East into rubble and protruding bone for the chosenites that have harnessed the amerikan Golem in the interests of the apartheid Khazarian monstrosity in Palestine. Deadbeat USSA is broke and can never pay its debt and the rest of the planet knows it too. The great flush of shit smeared IOU Saudi Mercan petroscrip dollahs is on and all of Don Chump's bluster means nothing until the swamp critters like Hildabeast and Obummer are hanging upside down by the heels in a shakedown like the thieving dogs in Rihad.

whatisthat Sat, 01/20/2018 - 06:19 Permalink

I would observe the US trade deficit with China is largely by design of the corrupt establishment and a result of American companies that have a  premise of manufacturing, operational and / or services in China (e.g., iPhones; household goods; generic pharmacuticals; clothing)

Let it Go Sat, 01/20/2018 - 06:41 Permalink

Three major obstacles face America's future prosperity. Regardless of record new highs in the stock market and the positive predictions being made by the media, there is no guarantee as to how long the current growth trend will last. America must confront and deal with its low job participation rate, exploding national debt, and the fact it is still a "high-cost producer" of goods which means jobs are not about to come rushing back because of the recently passed tax reform bill. More details can be found in the article below.

 http://Three Reasons America Faces A Difficult Economic Future.html

truthalwayswinsout Sat, 01/20/2018 - 07:04 Permalink

Trump is blowing smoke up our asses.

The trade deficit with China has two key elements. The first is the corruption of the ass wipes who run our government. The second is the massive and now unrelenting move to robotics.

The deficit with China will be gone within 5 years no matter what anyone does as robotics take over. It is cheaper to build things in the US with robotics because of resources and energy.

The corruption aspect is even easier to solve because all you need to do is announce reciprocal trade with China. If they have free trade we have free trade. If they have one way trade we have one way trade. That means if our companies cannot export into China without tariffs and all kinds of bribes and obstacles just like we have with Japan, Korea, and just about every other country on the plant, they will encounter the same problems with their exports to the US.

If we have reciprocal trade with China the Communist Government will fall in about 60-90 days. Every Chinese business will go bankrupt as they will no longer have the sucker in the room to screw. Amazon and Walmart will also go bankrupt but in reality who really cares.

The speed at which you can build a robotics factory to produce is astonishing. Most can be done in under 6 months. And with the new tax code, the write off is 100%. If you are scared to announce such a drastic plan you can always give them 1 year and increase the sanctions every month to give producers in the US the chance to take over. But no matter, Amazon and Walmart are gone.

 

Raisin Hail Sat, 01/20/2018 - 08:22 Permalink

So the wiener that wrote this worthless article might try to learn how to read a calendar. Our Chump in charge was not even president yet in Jan '17 when he starts tabulating our current trade deficit slide. Also if he actually had 2 brain cells that talked to each other it might occur to him that a bit of time might be required for any policy change or efforts at "jawboning" China would take a while to show up in the trade stats.

Raisin Hail Sat, 01/20/2018 - 08:22 Permalink

So the wiener that wrote this worthless article might try to learn how to read a calendar. Our Chump in charge was not even president yet in Jan '17 when he starts tabulating our current trade deficit slide. Also if he actually had 2 brain cells that talked to each other it might occur to him that a bit of time might be required for any policy change or efforts at "jawboning" China would take a while to show up in the trade stats.

rejected Sat, 01/20/2018 - 08:38 Permalink

What does America 'produce' that China wants? The US has goose egg for goods manufacturing.

So if the US doesn't produce much, how can the Trade Deficit ever equalize?

Go to any retail outlet,,, compare the number of American goods to foreign. I would guestimate it would be around a thousand to one or worse.

If Americans won't buy American products what makes anyone think foreigners will?

Let it Go Sat, 01/20/2018 - 10:17 Permalink

China will most likely not want to rock the boat and retaliate. People are naive if they do not recognize the distinct advantage a state-driven economy has over free enterprise, at least initially. A bit predatory in nature, such a system can quickly exploit the weaknesses of its competitors. It is important we recognize China is a state-run economy based on a business model that is geared to expand by crushing the competition.

Subsidizing those companies working within its system in a multitude of ways helps it achieve this goal. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and we in America are their prey. The article below explores the ramifications of this.

 http://China State-Driven Business Model.Geared To Expand html