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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Dec 08 2016

Risks to U.S. in Potential Trade Conflict

A key uncertainty about the Trump administration’s economic policies is its stance on international trade. This is especially important because the U.S. economy has become more export-dependent in recent decades, with U.S. exports running at about 13% of GDP, or one and a half times what it was at the end of the 2001 recession. Consequently, should the U.S. raise some trade barriers, it would be vulnerable to retaliatory moves by trading partners.

While President-elect Donald Trump has authored “The Art of the Deal,” it is a Chinese saying from Sun Tzu’s “The Art of War” that has been making the rounds recently in Beijing: “You can kill 1,000 enemies, but you would also lose 800 soldiers,” the message being that China could retaliate against any move to curb Chinese imports.



As for U.S. exposure to retaliatory trade sanctions, the U.S. exported nearly $210 billion of goods and services to China in the year ending Q3 2016, making China its third-largest export destination, after Canada and Mexico (chart). But those exports to China represent only about 1% of U.S. GDP, meaning that, while some individual companies could be hit hard by Chinese sanctions, the U.S. is clearly less susceptible to a trade war with China.

In terms of the trade balance, the U.S. has its most lopsided partnership with China. Chinese imports amounted to $492 billion in 2015-16 (first red bar), putting the U.S. trade deficit with China – represented by the height difference between the first set of blue and red bars – in a league of its own, at $282 billion. The next three largest trade deficits – with Germany, Mexico and Japan – are in the $56-to-$71-billion range, followed by the U.S. trade deficits with Italy, India, Korea and France, which are in the $14-to-$31-billion range.

The bottom line is that, with the U.S. suffering from a large, chronic structural trade deficit in the 21st century – over half of which is with China – it is understandable that the incoming administration might want to address the problem more aggressively. After all, the trade imbalance is the most obvious manifestation of the early-21st century globalization tsunami that quickly sucked millions of manufacturing jobs away from the U.S. heartland, igniting a strong desire for political change.

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