Why would you sabotage a perfectly good bull market to get a couple hundred billion in trade concessions?
I don’t know the answer to this question. But I do know that this is the risk President Trump is taking every time he adds another $50 billion in tariffs to Chinese imports.
As a headline, “Record U.S. Trade Deficit with China” pushes all the right buttons. We’re losing jobs! Incomes aren’t growing! China is Winning!
The reality of the big, bad trade deficit is a little bit different.
In 2017, the U.S. trade deficit with China was about $350 billion. That means Americans buy $350 billion more of Chinese stuff than China buys of ours. It’s kind of a big number.
Unless you look at it in terms of total U.S. GDP...
As a country, America produces about $19 trillion worth of goods and services a year. That’s trillion, with a T. So that $350 billion trade deficit amounts to 1.8% of U.S. GDP. It’s a rounding error.
Or think of it like this...
The S&P 500 has a market cap of $25 trillion. When Trump announces $50 billion in new tariffs and the S&P 500 sells off 1%, that’s $250 billion in lost value.
Somehow losing $250 to save $50 doesn’t seem like a very good way to get rich. But what do I know? I’m just an INVESTMENT ANALYST!
$50 – $250 = So Much Winning!
In 2017, the U.S. exported $1.546 trillion of goods to the world. About $130 billion of that went to China, with airplanes and soybeans accounting for about 20% of the total.
Imports to the U.S. from China totaled $505 billion in 2017. $70 billion of that was cell phones. Another $45 billion was computers, $33 billion in telecom equipment, and $31 billion in computer accessories.
So the U.S. trade deficit with China is about $350 billion. And as you can see, there’s clearly a lot of U.S. tech (ahem, iPhones) being made in China and then shipped back to the States. So yeah, you can certainly say U.S. jobs have been shipped overseas.
Except for iPhone manufacturing jobs. You can't say these jobs have been shipped overseas. iPhones have never been made in the U.S.
I guess maybe you could say these jobs should have been American jobs and that our unemployment numbers should be better. But even that's misleading. Right now, too many jobs are really the problem. The Bureau of Labor Statistics says there are over 6 million job openings around the country. That's enough to push the unemployment rate to zero.
But "America's Got Plenty of Jobs" just doesn't ring the register as a headline. Sorry.
I Got Your iPhone Right Here
But let's ignore the fact that the U.S. economy is cooking. Never mind that there are plenty of jobs and the real problem is training and social mobility.
(As a side note, social mobility is where you actually move to a location that has better employment prospects. My grandfather moved his family along the Gulf Coast as he welded oil pipelines, settled in San Francisco for a time as he worked in the shipyard, moved back across the Gulf, and finally settled in South Augusta, Georgia, where he taught high school algebra. Social mobility is at multi-decade lows.)
Let's say you wanna build iPhones. In China, assemblers make $400 a month. Foxconn, the company that assembles the iPhone, actually has eight opening for assemblers in the U.S. — at $8.68 an hour. I'm not going to make fun of that. If you need a job, you need a job. But I will say that perhaps we could set our sights a bit higher than a handful of minimum-wage jobs...
Another question that doesn't really get asked is: how much does China really benefit from this trade deficit? Again, $350 billion sounds good. And the way import/export numbers are counted, it sounds like China is just putting that $350 billion in the bank (or in U.S. Treasuries).
But here's the thing: China doesn't make all the parts that go into an iPhone. Or a Lenovo laptop. The iPhone will have chips from all over, a screen from Corning. The Lenovo ThinkPad will have an Intel processor. But when that phone or laptop gets shipped from China to the U.S., the total value of the item gets treated as an import on the ledger.
In real terms, the trade deficit is nowhere near $350 billion.
This is what really gets me. I understand that Trump promised to address trade issues. And there really are areas where there is true imbalance. The president is right to try and fix these areas of imbalance. But how much should he risk to be right and say he fulfilled his promise?
We've got mid-term elections coming up in a few months. I'm gonna go out on a limb and say that voters aren't going to like if the S&P 500 is down 10% because the trade war is in full swing. Look for this stuff to be resolved fairly soon.
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