A Novel Way Of Reducing The US-China Trade Deficit

The United States is trying to reverse decades of American production lines that have been moving to China after three years of trade disputes and disruptions due to the pandemic. This will lead to the loss of manufacturing jobs as well as industrial capabilities.

The U.S. government is determined to rebuild domestic production, especially of critical items, and to reduce its dependence on a more hostile strategic competitor. U.S. corporations are reassessing their sourcing risk in light of the possibility that China President Xi Jinping will stop shipments to the United States. One policy tool that could accomplish both is the cap-and-trade system. This would allow the U.S. and China to trade certain rights in return for certain rights to import certain amounts from China at a fixed dollar amount.

Need a new approach

Other options have failed. U.S. imports from China continue to rise and will likely surpass $539billion, which was the pre-trade war peak. China may follow the United States' lead and increase tariffs on Chinese products. Due to the length of tariffs and potential tit for tat responses, they create uncertainty for buyers. Although most complaints about China to the World Trade Organization have been won by the United States, the WTO has now concluded the long adjudication process and imposed penalties tariffs.

The United States has not attempted to set up large-scale subsidies or local content rules to help American companies compete with their Chinese counterparts. These are impossible because they encourage political gaming by all industries looking for protection. The federal government does not have the right department or the charter to ensure such a strategy can be implemented on time and strategically. The United States cannot match China's complex industrial policies and should not waste money trying. China exports four times more goods to the United States than the United States does currently. According to US Trade Data, China has a systemic advantage of 30% to 35% in production. Beijing's determination to take over America's high-tech goods means that the U.S. Trade deficit will likely not shrink.

It is strong evidence that China should be able to import less. The U.S.-China trade relationship began as a macroeconomic mismatch. America has open markets, low infrastructure investments, rich technology, large multinational corporations' investment in overseas production, and a highly valued (for trading purposes), currency. China, however, has closed markets and high levels of infrastructure investment. China's accession to the WTO in 2001 established a link between both economies. The steady flow of technology and investment from the United States to China led to increased trade. Different estimates show that the U.S. trade deficit has led to the loss of 3.7million jobs since China joined WTO. The normal adjustment mechanism to market-driven currency changes was not possible because China's currency was tied to the dollar.

How does a Cap and Trade system work?

The idea for a cap and trade system is inspired by a suggestion Warren Buffet made to reduce America's deficit in trade in 1987. He suggested that exporters receive import certificates equal to the exports they have made. These certificates could be used to trade in an "exceptionally liquid market" and would need to be purchased by U.S. businesses that want to import goods.

It would be possible to have a cap-and-trade system for imports from China that is similar to the one for greenhouse gas emissions. This system is free of bureaucracy, political favoritism, and unnecessary bureaucracy. The market would determine who imports what licenses. The cap can be adjusted to reach a goal like GDP or the size of the trade deficit.