The Bob Pritchard Column
Briton Ryle, a respected investment analyst asks why the US Goverment would sabotage a strong bull market to get a couple of hundred billion in trade concessions?
This is the risk President Trump is taking every time he adds another $50 billion in tariffs to Chinese imports. As a headline, “Record U.S. Trade Deficit with China” pushes all the right buttons with the GOP base. We’re losing jobs! Incomes aren’t growing! China is Winning! The reality is quite different.
In 2017, the U.S. trade deficit with China was about $350 billion. That means Americans buy $350 billion more of Chinese stuff than China buys of ours. It’s a big number, unless you look at it in terms of total U.S. GDP. America produces about $19 trillion worth of goods and services a year. So that $350 billion trade deficit amounts to 1.8% of U.S. GDP. It’s relatively insignificant.
The S&P 500 has a market cap of $25 trillion. When Trump announces $50 billion in new tariffs and the S&P 500 sells off 1%, that’s $250 billion in lost value. Somehow losing $250 to save $50 doesn’t seem like a very good way to grow the economy.
In 2017, the U.S. exported $130 billion worth of goods to China, with airplanes and soybeans accounting for about 20% of the total. Imports to the U.S. from China totaled $505 billion in 2017. $70 billion of that was cell phones. Another $45 billion was computers, $33 billion in telecom equipment, and $31 billion in computer accessories.
So the U.S. trade deficit with China is about $350 billion. And as you can see, there’s clearly a lot of U.S. iPhones being made in China and then shipped back to the States. So, while the government can say U.S. jobs have been shipped overseas. Except iPhone manufacturing jobs haven’t been shipped overseas because they have never been made in the US.
Also right now, too many jobs are really the problem. The Bureau of Labor Statistics says there are over 6 million job openings around the country. That's enough to push the unemployment rate to zero. But "America's Got Plenty of Jobs" doesn't motivate the base as a headline.
But let's ignore the fact that the U.S. economy is booming. Never mind that there are plenty of jobs. Let's say you want to build iPhones in the US. In China, assemblers make $400 a month. Foxconn, the company that assembles the iPhone, actually has eight opening for assemblers in the U.S. — at $8.68 an hour. Surely we could set our sights a bit higher than a handful of minimum-wage jobs.
Another question that doesn't really get asked is: how much does China really benefit from this trade deficit? Again, $350 billion sounds good. But China doesn't make all the parts that go into an iPhone. The iPhone has chips from all over, a screen from Corning. But when that phone gets shipped from China to the U.S., the total value of the item gets treated as an import on the ledger.
In real terms, the trade deficit with the Chinese is nowhere near $350 billion. I understand that Trump promised to address trade issues. But how much should he risk to say he fulfilled his promise?
We've got mid-term elections coming up in a few months. Voters probably aren't going to like if the S&P 500 is down 10%, that is $2.5 trillion lost due to a trade war because the Chinese have a trade surplus actually much less than $350 billion.
Whatever happened to logic, reality and truth or is it now just about winning at all costs?