Smaller trade gap may mean ‘leverage’
The US trade deficit with China will reverse in the long term, Alibaba cofounder Joseph Tsai was quoted by US-based financial network CNBC as saying on Wednesday. The forecast may be beyond some economists’ expectations, but it is entirely possible that his words become a reality.
China is now the world’s biggest importer of oil and soybeans and the potential top buyer of many bulk commodities such as liquefied natural gas.
Although China’s labor cost advantage has shrunk, the impact of that trend is mainly being felt on low-end manufacturing and services sectors. For the foreseeable future, China will retain its status as a major manufacturing power with the world’s most complete industrial chain. The status of China’s manufacturing industry will in turn further drive up the nation’s demand for bulk commodities.
The US is on a path to become one of the world’s top exporters of crude oil and natural gas, thanks to technical innovations such as the shale gas revolution. Bulk commodities are likely to become a bright spot in US exports to China, making the US an important supplier of raw materials.
If this economic model does not change, US trade deficit with China will shrink, and even reverse in the future. Then, it will the US that sees a surplus in its trade with China.
However, this is perhaps not what US President Donald Trump wants to see. The Trump administration does complain that the US buys more from China than China buys from the US, but it is clear that he wants to cut the deficit by increasing manufacturing exports to China, rather than selling more raw materials.
Therefore, efforts to bring jobs in manufacturing back to the US and curb the development of China’s high-end manufacturing are two strategies employed by the Trump administration. However, it will be very difficult for the US to achieve these two goals. US trade talks with China will help balance their trade, but bulk commodities such as soybeans are the focus of these talks.
The US trade deficit with China will narrow, but the main reason for this will be an increase of China’s demand, instead of an economic revival in the US manufacturing sector.
The ongoing trade war is expected to speed up the process and help the US reduce its trade deficit with China. The deficit will probably reverse in the long run and this will have a profound impact on bilateral relations. This new relationship, in which China is the buyer and the US is the seller, means China will gain more discourse power when its economy becomes a more important market for the US.
China can increase its bargaining power in negotiations with the US over issues such as high-technology exports and the price of commodities.