Washington stands to lose if it drags the tariff dispute for long

Responding to US Trade Representative statement on Section 301 action on July 10 that proposed imposing hefty tariffs on more Chinese imports, Beijing said the US had overestimated the size of its trade deficit and China is not responsible for it. Instead, the deficit is the result of the low savings rate in the United States, the US dollar serving as the international reserve currency, the two countries’ differences over the international division of labor, and the US’ restrictions on high-tech exports to China, the Ministry of Commerce said.

There is, however, another reason for the US’ “massive” trade deficit with China, say some US researchers, who believe that “trade hawks” in the Donald Trump administration have deliberately exaggerated the trade deficit figure by excluding US service exports, and that has its own risks.

At a March 23 news conference, Trump famously said: “Last year, we lost $500 billion on trade with China.” That was fake news, said Alan Reynolds, a senior fellow at the Cato Institute, a Washington-based think tank. “The correct number was $335.7 billion once we count the $40.2 billion US surplus in services,” Reynolds said, adding that if the $35 billion trade deficit Hong Kong had with the US were included — and rightly so, as Hong Kong is part of China — the US’ trade deficit with the Chinese mainland-Hong Kong combined would be $300.6 billion in 2017, $200 billion less than what Trump claimed.

There’s no excuse for not counting services when calculating trade, as the US is predominantly a service economy. Rising US service exports accounted for one-third of the total exports from January through May, and the US surplus in services shrunk the total deficit by 31 percent, Reynolds said, citing US Census Bureau data.

Private services accounted for 69 percent of the US’ gross domestic product and 128.2 million jobs in June, while goods-producing industries together accounted for only 20.7 million jobs in June, the researcher wrote in an analytical report last week. “When President Trump and his trade war generals talk excitedly about bilateral trade deficits, they invariably talk only about goods — never services,” Reynolds said.