Trump’s Plan to Close the Trade Deficit with China

Rags to Riches

Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.

The search results had such a profound impact on Ma that he returned home to China and immediately started his first internet business.  After several tries he hit it big with Alibaba.  So much so that he’s accumulated a net worth of $27.1 billion USD – over 7.3 times more than President-elect Trump.  Not a bad rags to riches story for a poor Chinese school teacher.

Indeed, Ma takes a shrewd, yet casual, approach to business.  Back in 2014, he got a little sozzled up and bought China’s most popular soccer team from fellow Chinese billionaire Hui Ka Yan.  All in all, the soccer team purchase only cost Ma $192 million. As Yan recounted  of how the deal with Ma went down:

“By accident I got him drunk.  I told him my Evergrande soccer team is planning to issue shares and raise money to support strategic development, will you join?  He said I will. We finished it in 15 minutes.”

One of the great marvels of life is the direction in which money flows.  From whose hand is it given?  By whose hands is it received?  In general, money has flowed from West to East with nary an interruption for nearly three decades.

How to Create One Million New U.S. Jobs

On Monday, Jack Ma visited the Trump Tower in New York.  There he met with President-elect Donald Trump to talk business.  Namely, they discussed how to loop the flow of money back to the West.

“Jack and I are going to do some great things together,” said Trump following the meeting.  Reportedly, they intend to create one million new U.S. jobs.  Obviously, this is no easy feat.

Step one involves signing up one million small and medium-sized U.S. businesses and farmers to the Alibaba platform.  Step two, the more organic of the steps, is predicated on Ma’s intuitive estimation that each company will subsequently hire a new person because of the added commerce.

Hence, that’s how Ma and Trump propose to create one million new U.S. jobs.  Given the track records of these two fellows, is there any reason to believe that this plan won’t work?

We know that U.S. consumers have a vast appetite for cheaply made Chinese goods.  On the flip-side, we’re discovering that Chinese consumers have a vast appetite for U.S. produce.  In fact, they’re already buying it via the internet.

“U.S. produce sold on Alibaba’s platforms includes Pacific Northwest cherries, Washington State apples, and Alaskan seafood.”  Who would’ve thought?

Trump’s Plan to Close the Trade Deficit with China

The U.S. has run a current account deficit, which reflects the amount of goods and services imported in excess of those exported, for the last 26-years.  In just the third quarter of 2016, the current account deficit was $113 billion.  In other words, the U.S. sent approximately $1.25 billion dollars more per day to other countries than it received through trade.

Much of this trade deficit, no doubt, is being racked up with China.  Perhaps the selling of cherries and apples on Alibaba by U.S. growers to Chinese consumers will help close the trade gap.  Unfortunately, it’s unlikely these trade volumes will be high enough to make a meaningful dent.

Another alternative to closing the trade deficit with China that Trump has mentioned involves jacking up tariffs on imports from China from about 3 percent to 45 percent.  According to Gene Ma, chief economist for China at the Institute of International Finance:

“The direct impact on GDP would be sizable.  The value added by export[s] is about 10 percent of China GDP, and [the] U.S. accounts for about one-fifth of China exports.” 

US Balance on Current Account

The US current account deficit: a reflection of the greatest credit bubble in human history - Click to enlarge

As economist Henry Hazlitt explained many years ago, in Chapter 11 of Economics in One Lesson, Who is “Protected” by Tariffs:

“The effect of a tariff […] is to change the structure of American production.  It changes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another.  It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller.  Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.”