The New Approach to reducing Trade Deficit Between The USA And China

After three years of trade disputes and interruptions due to the pandemic in 2003, the US is trying to reverse decades worth of American industrial lines that were shifting to China.

After three years of trade disputes and interruptions due to the pandemic in 2003, the US is trying to reverse decades worth of American industrial lines that were shifting to China.

This will result in a loss of manufacturing employment and industrial capability.

The US government is determined to revive American manufacturing, especially of key items, as well as reduce its dependence on a more hostile strategic partner. American companies are evaluating their sourcing risk in light of China's President Xi Jinping's potential ban on US exports.

One policy option that could help achieve both of these goals is the cap-and trade system. This would allow China and the US to trade certain rights for the right to import a certain dollar amount from China.

A New Approach Is Required

Other solutions have failed. China's imports continue to rise and will surpass $539 billion by 2021. This is the highest level of imports since before the trade war. China could follow the US lead and increase taxes on Chinese products. Because of the length of tariffs and the possibility of tit for tac replies, buyers are uncertain. The WTO has completed the long adjudication process and levied duties despite the fact that China has been largely convicted at the World Trade Organization.

The US has not tried to create large-scale subsidies nor local content regulations in order to help American businesses compete with Chinese counterparts. They are unsustainable because they encourage companies to play political games in order to get protection. The federal government does not have the appropriate departments or charter to ensure such a strategy can be implemented in a timely manner and strategically. It is futile to try to match China's complex industrial strategies.

China currently has four times the number of American products that it sells to China.

According to US Trade Data, the US trade imbalance won't decrease due to China's production systemic advantage. This is despite the high shipping costs and Beijing's desire to replace high-tech American products with its own.

It is obvious that China should have the right to import fewer goods. China and the United States have a trade relationship that began with a macroeconomic mismatch. America is known for its open markets, low infrastructure investments, high technology, large multinational firms' offshore production investments and highly valued currency (for trade purposes). China, however, is investing heavily in infrastructure and has limited access to markets. China joined the World Trade Organization in 2001 to establish a link between their two economies.

The gradual migration of investment and technology from the United States to China resulted in increased commerce. According to different estimates, the US trade deficit has led to the loss of 3.7 millions jobs since China joined WTO. The regular adjustment procedure for market-driven currency movements was not possible because China's currency was tied to the dollar.

China made great sacrifices to join the WTO but did not fulfill its promises. China continues to support its state-owned technology sector, but refuses to open large government procurements to foreign companies. Technology-sharing rules prevented foreign corporations from doing business in China. China has been slow to allow American companies access to its market for the past 20 years. It is similar to the United States'. It has destroyed the notion that a country can only export goods and not purchase products from other countries. This is one of the pillars of the global trade system.

How would a Cap and Trade System look?

Warren Buffet's suggestion to reduce America's trade imbalance of 1987 infected my idea for a cap-and-trade system. He suggested that exporters receive import certificates equal in value to their shipments. These certificates could be used to trade on a "very liquid" market and would need to be purchased by US companies that are looking to import goods.

Similar to the system for greenhouse gas emissions, a cap-and trade system could be used for Chinese imports. This system is free from unnecessary bureaucracy, political favoritism and bureaucracy. The market would decide who imports which licences. You can change the cap to achieve a specific goal, such as increasing GDP or reducing trade deficit.