American Rescue Plan: US stimulus seen widening trade deficit that sparked Trump’s trade war with China

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The US$1.9 trillion American Rescue Plan is poised to attract more Chinese imports. Photo: Reuters

The US$1.9 trillion American Rescue Plan is poised to attract more Chinese imports, and analysts expect it to widen the United States’ contentious trade deficit with the world’s second-biggest economy.

The stimulus will add about US$30 billion to US imports from China this year, estimates Derek Scissors, chief economist at China Beige Book International, a data-collection platform tracking the Chinese marketplace. And if all of the stimulus dollars were to be spent rather than saved, Societe Generale estimates it would pull in as much as US$40 billion in additional Chinese imports.

Even if China ramps up buying under a trade deal signed with the US in January 2020, this would not be enough to offset the gravitational pull of the stimulus. The risk is that, with bilateral relations already at their lowest point in decades, a rapidly widening trade deficit adds more friction – especially if China falls short of buying targets agreed in the trade accord.

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“A strong recovery – for example, a 9 per cent increase in nominal (gross domestic product) – would push the bilateral goods deficit past US$500 billion and draw political attention,” Scissors said.

China’s trade with US failed to meet phase-one deal targets in 2020

The administration of President Joe Biden views former president Donald Trump’s fixation on the bilateral trade deficit with China, which rose 7 per cent to US$317 billion last year, as a strategic blunder. So far, in public comments, there has been little focus on it. Instead, the new government emphasises the need to build alliances with other Western nations to counter trade practices by China they deem mercantilist. But that effort has seen little progress as the new government prioritises the battle against the coronavirus pandemic and other domestic issues.

In the meantime, Chinese exports are surging. Shipments jumped 60.6 per cent in dollar terms in January and February from a year earlier, boosted by strong demand and comparisons with a low base a year earlier because of coronavirus lockdowns.

An export orders subindex of the Caixin manufacturing purchasing managers index jumped to 51.4 in March from 47.6 a month earlier, signalling robust global demand.

Rabobank estimates China’s world-trade surplus will grow by almost 8 per cent in 2021 to US$576 billion, while HSBC Holdings sees it hitting a record US$630 billion, bigger than Thailand’s economy.

“US policy is lifting interest rates, the exchange rate and the trade deficit,” said David Dollar, a senior fellow at the Brookings Institution in Washington who previously served as the World Bank’s country director for China. “We need to recognise that this is the side effect of the large stimulus.”

Exactly where the bilateral trade balance lands this year also hinges on factors including the price of oil, which accounts for about 10 per cent of China’s imports, and on how aggressive China’s trade-deal buying is, says Michelle Lam, a China economist at Societe Generale in Hong Kong.

During the trade war, Trump slapped tariffs on about US$370 billion worth of Chinese goods. China retaliated with import duties of their own, worth around US$110 billion, on US products.

Last year, China fell about 40 per cent short of its commitment to buy an additional US$200 billion worth of US goods over two years, with the impact of the pandemic only partly to blame for the shortfall, according to an estimate by the Peterson Institute for International Economics in Washington. And in the first two months of this year, China fell farther behind the needed buying pace, the institute said.

The (trade) deal might be amended during the year, or possibly even abandoned altogether if tensions really flare up
Michael Every, Rabobank

New US Trade Representative Katherine Tai said at her confirmation hearings that she would enforce the trade deal. “Every good negotiator retains his or her leverage,” she told The Wall Street Journal last month, while adding that the US may be open to trade negotiations with China.

The deal calls for the US trade representative to meet with a Chinese vice-premier every six months. The next meeting is almost two months overdue, and there is no sign of talks being scheduled. “The deal might be amended during the year, or possibly even abandoned altogether if tensions really flare up,” says Michael Every, head of financial markets research for Asia-Pacific at Rabobank in Hong Kong.

Peterson senior fellow Chad Bown says the “dubious” policy of reducing the bilateral trade deficit should be scrapped anyway, because purchasing commitments have sowed distrust among allies that the US now wants to work with to tackle their China concerns. As a result, even a sharply widening US trade deficit with China may produce only a muted reaction from a Biden administration that is working on a broader China strategy than Trump did.

“Given the extent to which US-China relations have deteriorated, it’s unlikely that a rising trade imbalance could take them much further down,” said David Loevinger, a former China specialist at the US Treasury and now an analyst at fund manager TCW Group in Los Angeles. “I expect the Biden administration will be much more focused on Chinese unfair trade practices and other barriers to US exports.”

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