What Trump doesn't understand about our trade deficit with China

All in all, the Chinese buy about 30 cents’ worth of U.S.-made stuff for every dollar’s worth of Chinese-made stuff we buy. And, because we’re talking about the world’s two largest national economies here, those numbers get pretty big. If it isn’t tariffs — and it isn’t — why is our trade deficit with China so large?

For one thing, China is poor. Its economy has been growing, and it’s far better off than it was a generation ago, but it’s poor in a way that Americans don’t know from poor: The average family income in rich Shanghai is less than $5,000 a year, and in relatively hardscrabble Gansu, it is less than $2,000 a year. A pair of made-in-the-U.S.A. Frye boots costs a month’s pay in China, and very poor people don’t buy a lot of what the United States exports: airliners, software, pharmaceuticals and medical devices, etc. Beijing interferes with trade, of course, but the fundamental economic fact behind our trade imbalance is that the Chinese still aren’t rich enough to buy a lot of the stuff that we Americans make. They buy tons and tons of our soybeans, but they can’t afford very many of our awesome bicycles.

Beyond that, China may be officially socialist, but it doesn’t have much of a welfare state, so the Chinese save — a lot. Chinese families generally save a quarter or more of their income, because they don’t believe that they can rely on the government to take care of them when they get sick or old or face other troubles. So even though they’re earning a lot of U.S. dollars with their exports, they aren’t using those dollars to buy a lot of U.S. goods — rather, China holds a lot of dollars in its reserves, in effect lending us a portion of the goods we consume or, looked at another way, financing our purchases with negative real interest rates. And on top of all that, China isn’t blessed with a lot in the way of the natural resources it needs to make its economy go, so it has to spend a lot of the dollars it earns on raw materials and supplies from abroad (and the United States is only one of many suppliers here) because nobody will take renminbi when U.S. dollars are to be had.

(Would you?)

Our trade deficit with China isn’t a product of the Chinese getting rich — it’s a product of their being poor.