Donald Trump has repeatedly accused China of manipulating global financial markets to gain a trade advantage over U.S. industries.
The President-elect says China is intentionally weakening its currency, the yuan, thereby making U.S. dollars relatively stronger and Chinese goods appear artificially cheaper. This illusion of cheap Chinese goods hurts U.S. industries, so the theory goes, and American jobs suffer as a result.
Here's a tiny taste of Trump's China theory:
"Look at what China is doing to our country ... They are devaluing their currency and we have nobody in our government to fight them ... They are using our country as a piggy bank to rebuild China."
It's a neat theory that plays well in the Rust Belt (i.e. Trump's core constituency) but upon closer inspection of the facts reveals a more complicated truth.
Not Just China: America's Trade Issues Run much Deeper
First, the facts. As Hedgeye Senior Macro analyst Darius Dale writes in today's Early Look, China is the U.S.'s third largest export market, following Canada and Mexico. In 2015, the U.S. and China exchanged a total of $599 billion goods and services, with China netting a $367 billion surplus advantage (in other words, China exported $483 billion to the U.S.; U.S. exported $116 billion to China).
So far so good for Trump's theory.
But here's where it gets a little murky. The U.S. ran trade deficits with 100 other countries last year, Dale points out, so it's odd to single out China as the bad actor on global trade.
"To the naked eye of a less-informed populist like Trump, the U.S.’s disadvantage comes across as the result of bad trade deals and unfair trade policies on the behalf of the Chinese government. From our vantage point, that’s only half true at best.
Specifically, the U.S. doesn’t have a series of bilateral issues with China and other key trading partners; in 2015 it ran trade deficits with 101 countries. One hundred and one. The broad-based nature of our bilateral trade deficits is not likely to be the result of “bad deals” or “unfair practices” as Trump and his national trade team have repeatedly suggested."
THE U.S. HAS A CONSUMPTION PROBLEM, NOT A CHINA PROBLEM
So what are we missing here? The U.S. consistently consumes more than it saves. Plain and simple. As you can see in the Chart of the Day below, U.S. Gross National Savings less Investments as a percentage of GDP (in short, the amount of money Americans save each year) has been negative for the past 35 years. This mirrors the U.S.'s Current Account Balance as a percentage of GDP (essentially the net trade balance, or exports minus imports, versus the broader U.S. economy).
There you have it.
Why Trump's Misconceptions Matter
Facts don't always filter into policy. That's the risk. Trump's rhetoric plays well among his core constituency so there's a considerable amount of risk to investors who blindly dismiss the possibilities of a full-blown U.S.-China trade war. Trump's pick for director of the National Trade Council, Peter Navarro, is no salve. He literally wrote the book on combating Chinese trade and the country's increasing militarism. (see "Death by China" and "The Coming China Wars.") In other words, this is a risk worth watching.
More to come.