Trump Tariffs Will Not Tame China’s Trade Surplus

One does not have to be a fan of President Donald Trump’s trade policies to recognize that stresses in today’s global trading system are not easily remedied by existing policy tools or institutions, including the World Trade Organization (WTO). But crafting an appropriate U.S. response will not be easy.

Scott Bessent, Trump’s choice for treasury secretary, has argued that “governments’ choices about the structure of their economies” have created unsustainable imbalances in the global economy.

He is right. And while a number of countries have run persistent trade surpluses as a result of policy choices (including Germany and Japan), the biggest imbalance today is between the United States and China, the world’s two largest economies. China’s size and impact on global markets puts it in a category of its own.

The United States alone cannot remedy its large trade deficit without action on the part of surplus countries, most notably China. The reason stems from imbalances in the U.S. and Chinese economies and from the fact that in a global economy one country’s surplus is matched by deficits in other countries. Just as balancing a seesaw requires that both parties move in equal and opposite directions, rebalancing trade flows requires action by both surplus and deficit countries.

But if one party puts a weight on the scale and prevents rebalancing from taking place as the natural result of ebbs and flows in trade and finance, then imbalances can persist and even grow over time. That scenario explains some of the persistent imbalances between China and the rest of the world, including the United States.

China and the United States are near mirror images of each other when it comes to macroeconomic structure: due to policies that have long suppressed household income and consumption and favored investment, especially in export-oriented manufactured goods, China has one of the highest levels of investment in the world—about 43 percent of gross domestic product (GDP)—and one of the lowest household consumption levels—about 37 percent of GDP, a share which has declined over time.

The result is overproduction of goods that are then exported to the United States and other countries. And because China saves more than it invests (due to policies that suppress consumption), its excess savings flow abroad. The gap between its savings and investment is equal to its trade (current account) surplus. Only by reducing the gap between savings and investment can China reduce its trade surplus. And this means boosting household consumption, a prospect that appears increasingly unlikely.      

In contrast, consumer spending (about 68 percent of GDP) fuels the U.S. economy, and because the domestic savings pool is insufficient to finance investment (about 22 percent of GDP), the United States imports savings from abroad. The gap between savings and investment in the United States is reflected in the trade (current account) deficit.

The United States can take steps to correct the economic imbalances that fuel its global trade deficit—most importantly, by reducing the budget deficit and reliance on foreign capital inflows to finance it. While Trump has charged billionaires Elon Musk and Vivek Ramaswamy with finding massive spending cuts, the notion that sufficient cuts can be made without touching Social Security, Medicare, or defense spending is fanciful. Tax cuts proposed by Trump will add to the deficit.

As he did during his first term, Trump has also proposed high tariffs on Chinese imports to reduce the bilateral trade deficit. Even ignoring the disruption to U.S. import-reliant producers and higher prices for consumers, tariffs will not impact China’s overall surplus with the rest of the world. And while higher tariffs on Chinese imports (and on imports from other countries that Trump has named) could increase federal revenues, the increase is likely to be much smaller than he imagines, especially if they reduce imports as intended.

A multilateral approach through channels such as the WTO is hardly more promising. The postwar rules-based trade order, largely fashioned and led by the United States, is on weak foundations today. In a world of sovereign countries, no outside institution or power can force a country to change its domestic policies to suit their own purposes. In the trade realm, such an order requires that WTO member countries voluntarily adhere to norms and rules they agreed to upon accession.

China’s economic and trade policies and practices are fundamentally at odds with its WTO commitments, including its pledge to move toward a market-based economy. The United States, too, since the first Trump administration and continuing under President Joe Biden’s administration, has taken trade measures that conflict with the spirit, if not the letter, of its WTO commitments.

If ever there was a time when the United States needed allies and partners to address a common challenge, it is now. Other countries share the United States’ concern about the impact of China’s excess manufactured exports on their own production and employment levels. Bessent has proposed doing statecraft with a group of like-minded countries to achieve U.S. economic and geopolitical goals. But how much influence he will have in the administration and whether his ideas will win support from the president remain to be seen.

The question is whether Trump recognizes the value of forging a unified approach to address the disruptive effects of China’s unbalanced approach to growth and trade. The record of Trump’s first term, coupled with statements made in the lead-up to inauguration, suggest that his overall foreign policies could drive other countries away from cooperation with the United States on this and other objectives.

If Trump insists on going it alone, U.S. economic leadership will suffer, and the country will be in a much weaker position to address the economic challenges facing it now and in the future.

Joanna Shelton is former deputy secretary general of the Organization for Economic Cooperation and Development (OECD) and a RealEcon advisor.