China’s trade surplus with the United States rose by 13% in 2017 to a record $288 billion, according to Chinese official data. The actual figure reported on the Chinese side was 1.87 trillion yuan, which most Western news outlets converted to $276 billion. What’s $12 billion between friends? Take your pick; both numbers are big.
But not big enough. The U.S. reports trade figures monthly, and U.S. data showed that the trade deficit was already $342 billion by the end of November. Consolidating the $30 billion U.S. surplus with Hong Kong (most of which goes to China) puts the all-China deficit at $312 billion for the first 11 months of 2017. Add in another $30 billion or so for December, and the full-year 2017 U.S. trade deficit with China and Hong Kong is likely to come in at around $340 billion.
That means that the final 2017 U.S. deficit with China/HKG may be up 17%-18% from the $280 billion consolidated China/HKG deficit recorded for 2016. The official U.S. trade deficit with China reported by the U.S. Census Bureau on February 6 will be big, growing and politically messy. And it shouldn’t worry anyone at all.
Trade deficits mean different things in different economies at different times. In a weak economy hit by major shocks and falling into recession, big trade deficits can be a sign that a country is spiraling out of control toward a balance of payments crisis. But that hardly applies to the U.S. today.
In a strong economy, a big trade deficit simply means that more capital is flowing into a country than is flowing out. That’s because when the capital account is positive, the current account has to be negative to balance it out. And a negative current account means a trade deficit.
They question for America’s economic health is: Why capital is flowing in? Is capital pouring into the United States right now seeking investment opportunities, or is capital being sucked into the U.S. because of an economic crisis requiring external funds to stabilize a rapidly deteriorating situation?
Coming amidst the fastest economic growth in three years and four Fed rate hikes in 12 months, it seems clear that America’s burgeoning capital account surplus reflects the fact that international investors are looking for a piece of the action in the world’s more advanced, most dynamic mature economy.
If the Trump tax cuts succeed in boosting growth and (especially) in convincing companies to repatriate profits currently held overseas, look for the U.S. trade deficit to widen even further in 2018 as the money pours in. That may be good, bad or neither for long-term economic growth, depending on who you believe. But it will still have nothing to do with China. The U.S. trade deficit is proudly made in America.