China In a Bullish Shop

America’s trade differences with China grab many headlines these days.  Afterall, we do have a large trade deficit with the nation, and one of President Trump’s campaign focuses was making that relationship more balanced.  The administration is in the process of dealing with the issue, but it is unclear how close we are to a resolution. No matter how it gets spun, it is a complex matter.

Predominant ivory tower wisdom suggests simply trying to negotiate away our trade chasm with China ignores the interrelated complexity of a global manufacturing and trading environment and developing economies.  In fact, according to Mary E. Lovely, a nonresident senior fellow at the Peterson Institute, our nation is currently heading in the wrong direction when dealing with China.  She was interviewed on Bloomberg Surveillance and gave two interesting statistics which she believes informs the Chinese unwillingness to negotiate.  First, American purchases of China’s manufactured goods only represent about three percent of their total revenue.  Some reduction in this source of revenue is not the powerful drag our Commerce Department might have us believe.

Second, of U.S. operations in China, roughly 70 percent of their production is sold into Asia.  Since, in her opinion,  Asia’s economic growth is faster than America's as nations like Vietnam continue modernizing and growing.  Firms have a greater incentive to invest in capital goods closer to that accelerating consumer market versus here in the U.S. given all the additional cost associated with increased logistics.

Additionally, many U.S. complain that they are having their intellectual property stolen by the Chinese.  One of the biggest thorns in the side of American companies manufacturing in China is the nation’s requirement that they give away company secrets to gain access to the less expensive factory base.  Multinational companies are being asked to trade their intellectual property for cheaper output.  Thus far, the cost has not outweighed the benefit, so new manufacturing plants are built.  But how long can that continue before serious resistance to this regimen surfaces? 

Economic theory continues to be rewritten in the post-financial crisis era, and a new chapter could be being developed as we speak.  President Trump has been willing to push against conventional wisdom since taking the oath of office.  The administration’s approach to international trade is not being taught in many (if any) economics courses.  However, that could be about to change. The White House might prove popular theories are incorrect.  Of course, the new approach could end up in textbooks after a colossal failure also.  More likely, something in between will be the actual outcome, giving the dismal science even more data to process, and its practitioners more fodder over which to argue. 
(by J R and Christopher)