Is Trade Deficit a Problem?

Free trade creates wealth and is mutually beneficial, which is exactly why we need it. Under free trade, whether it is a trade surplus or a trade deficit is a natural result, never a problem. However, many Keynesians have a different perspective. They claim that only trade surplus, when exports exceed imports, contributes to GDP and increases wealth. A trade deficit, when exports are less than imports, is a negative contribution to GDP and does not increase wealth. After every financial crisis, countries engage in trade protectionism, restricting imports and increasing exports, and end up in a lose-lose situation.

External balance is actually a reflection of the internal balance. For a country, any thing that increases output or reduces domestic absorption increases its trade surplus, simultaneously expanding its partners' trade deficits. Conversely, any thing that reduces output or increases domestic absorption shrinks the country's trade surplus while dropping its trading partners' trade deficits simultaneously.

What have caused the U.S. enormous trade deficit with China

The U.S. has a well-known enormous trade deficit with China. What are the reasons for this? It must arise from bilateral interaction between the two countries, as trade is inherently reciprocal. From China's perspective, the following factors contribute to the U.S. large trade deficit with China.

1. Because of family planning policies, Chinese people have to save extensively due to inadequate aged care from their children.

2. China’s economy features public ownership of key means of production, a high proportion of the state-owned sector and significant government intervention in economic activities. These traits inevitably lead to insufficient consumption and excess capacity.

3. The U.S. is competitive in sectors such as film, the internet, and finance, but China does not open these markets.

However, if China had produced endlessly but there had been no demand from the United States, there would be no such enormous U.S. trade deficit with China. From the U.S. perspective, the reasons are:

1. Americans enjoy artificially high wages and welfare benefits, and consume more than their production.

2. The U.S. dollar is the world’s reserve currency. Thus, the U.S. must run deficits for other countries to have dollars.

3. China and the U.S. have opposing values and political systems, leading the U.S. to restrict high-technology exports to China.

The vast trade imbalance between China and the U.S. is driven by both fundamental economic principles and deliberate policy effects.

In 2018, Professor Xie gave a lecture on the global economics outlook that exposed the underlying logic of the US-China trade relationship. His analysis also accurately predicted economic developments that have since come to pass.