USA has been imposing tariffs and making imports into its country more and more difficult. It is closing its markets for many countries like China, but the question remains why ?
USA has been a major influence in world economy, generally dictating the world economy But why is it trying to slowly close its economy and move away from globalization. The main reason stems from the fact that the USA has the highest Current account deficit of all countries in the world, almost 4.5 times larger than the next country i.e United Kingdom
So what is Current account Balance deficit and what does it mean :
The balance of trade or Trade Balance is the difference between the value of a country's imports and exports for a given period. The balance of trade is the largest component of a country's balance of payments.
So whats the problem with USA's Trade deficit ?
Theoretically, a trade deficit can hurt a country's employment levels if its goods aren't purchased abroad. That's because the country whose goods don't enjoy foreign or domestic demand might lose jobs in manufacturing those goods, potentially causing the economy to suffer. That happens when foreign countries make and sell the same products at a much lower price than domestically-manufactured goods. Domestic products can't compete, so more of the manufacturing is outsourced to the country that produces it at the lowest cost.
This scenario has played out for decades in the U.S., where critics have blamed free trade treaties like the North American Free Trade Agreement for enabling foreign trade partners to sell their goods into the U.S. more affordably than domestic manufacturers. Despite recent moves to rewrite the treaty and reduce regulations in the U.S. in order to bring back manufacturing jobs to the U.S., it is difficult to reverse outsourcing of production from a country with regulations and much lower wages than the U.S. Since consumers are free to purchase the most affordable goods and prefer cheaper imports if they're of comparable quality, U.S.-made goods are at a disadvantage. And once lost, it is challenging to regain the manufacturing skills lost to outsourcing. Raising tariffs on foreign imports as the Trump administration has recently done can also hurt domestically manufactured production and consumers by causing inflation and sparking a trade war that can cause foreign buyers to raise tariffs on U.S. exports. U.S. companies will also see the cost of foreign goods they use in manufacturing their products increase, which can further hurt U.S. companies' competitiveness.
Another downside to a trade deficit like that in the U.S. is that it can devalue the country's currency. If a country isn't exporting much, then foreign buyers don't need to buy that country's currency to purchase its goods. Low demand for the currency causes it to fall. Devalued currency may also cause inflation.
So why is USA still in a very good position?
Although the U.S. has had a trade deficit for decades, it has been spared somewhat from severe currency devaluation and inflation by the fact that the U.S. dollar (USD) is a global reserve currency. That means that most countries in the world hold large quantities of USD with which to conduct international trade and investments. Bolstering its position as the reserve currency, the USD makes up a majority of all foreign exchange trades. Also, U.S. Treasuries are considered among the world's safest investments, and foreign governments purchase the debt with USD from their trade with the U.S. One of these governments is China, which has a large trade surplus with the U.S.
The China and USA Problem?
China became the U.S.'s largest creditor in 2008, and has since remained the largest holder of U.S. national debt, with about $1.2 trillion approx as of the Fourth quarter of 2018. Japan is the second-largest, holding about $1.023 trillion.
So why isn't the U.S. economy crumbling under the weight of all this debt in the hands of foreign governments ?
As explained above, the U.S. dollar is supported by its status as the global reserve currency. That means it's not easily devalued as the currency of any other country with a massive deficit would be, and therefore also avoids runaway inflation. The inflow of affordable products from places like China into the U.S. also helps the consumer and keeps inflation in check. Another factor that might be helping the U.S. keep it together is the perception that, despite its huge trade imbalance, its many business are global powerhouses that are thriving, and that may not be reflected by the trade numbers. Although the U.S. borrows to fund its trade deficit, there is borrowing that depletes a country and borrowing that helps it invest for the future.
The U.S. may benefit from the general perception of being a global leader whose businesses invest in ways that advance the country. If the U.S. is borrowing to fund technology and machinery that will lead to economic growth, then running a deficit for investment isn't necessarily a bad thing.Given its large corporate interests and also being the world's financial capital, the U.S. economy is complex and the simple trade balance equation may not capture the full trade picture. For instance, large U.S.-based corporations like Apple manufactures its components and products overseas, then sells its products in the U.S. as imports even though the company revenue is booked in the U.S. That benefits the economy here, but it's not reflected in the U.S. balance of trade.
Once in a while, a trade surplus is an unfavorable trade balance. China and Japan have both become dependent on exports to drive Economic Growth. They must purchase significant amounts of U.S.Treasury to keep the Dollar's value high and the value of their currencies low. That's how they keep their exports competitively priced and maintain their trade surplus. But this export-driven strategy means they rely on U.S. customers and U.S. foreign policy. In addition, their domestic market is weak. Chinese and Japanese citizens must save to provide for their old age since their governments don't have strong social services.
So Can China's Dominance over power USA?
China has, in the past, hinted that it could crush the U.S. if it wanted to by selling its massive U.S. Treasury holdings. It has held this threat over the U.S. to try to gain advantage in trade negotiations; however, as one of the largest holders of U.S. Debt, China would suffer the most after America if it tried to crater the Treasury market. Since there isn't really another bond market of equal size, stability or liquidity, if China were to try to sell a large portion its Treasuries, it would be difficult for the behemoth to find a counter party to take the other side of a gigantic sale.
Assuming it did find someone to buy its Treasury holdings, China would have to then find somewhere safe to invest billions of dollars. Even if China were to buy up the sovereign debt of all the world's developed markets, the sudden surge in demand might drive yields in those markets negative. China would have to pay to own their debt. It seems unlikely the sovereign would want to make such a move as interest rates are rising in the U.S.
Implications : A progressive closing of the world’s largest economy to trade will slow both US and global growth prospects slowing down economic growth. With so much of interconnections between China and USA and the Quantity of import USA does it may have spill over effects in other countries as well. However in the long run it may certainly boost USA's job creation and economic growth but the uncertainty in the short run can cause a lot of damage before any good happens. References:
https://www.cfr.org/timeline/us-relations-china https://www.brookings.edu/blog/up-front/2017/12/26/what-to-expect-from-the-us-economy-in-2018/
https://www.financialexpress.com/economy/progressive-closing-of-us-economy-to-damage-global-trade-growth-says-international-chamber-of-commerce/1136182/ https://www.bbc.com
https://en.wikipedia.org
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