The U.S.-China Economic and Security Review Commission (informally, the U.S.-China Commission or USCC) reported that Chinese exports to the United States are falling over three times faster than U.S. exports to China.
The U.S. Congressionally-funded USCC found that the goods deficit with China fell to $32.8 billion in July 2019, from $37 billion in July 2018. While U.S. exports to China fell by $1.3 billion, China exports to the United States fell by $4.6 billion, or 353 percent faster.
USCC expects recently announced tariff increases by both the United States and China will lead to further contraction in both imports and exports for the months ahead.
The 2018 total U.S. annual goods deficit with China was $419.3 billion, with a deficit of $223 billion for the first seven months that year. In 2019, the total U.S. goods deficit through July fell to $199.8 billion.
Outsourcing of U.S. goods production is at the center of the Sino-U.S. trade war. It is estimated that U.S. corporate overseas affiliates employed 14.3 million workers mostly in technology, manufacturing, human resources and call centers. That amounts to almost 2.4 times the 6 million unemployed U.S. legal residents, according to the latest report from the U.S. Bureau of Labor Statistics.
China leveraged its low wage and non-existent labor and pollution standards to rapidly expand manufacturing capacity in consumer electronics beginning in the 1990s. China initially offered tax holidays to attract foreign companies to assemble low-value electronics like cameras, monitors, and microphones.
Foreign companies wanting to “gain a foothold in China’s consumer market” were required as a pre-condition to form joint-ventures that included technology sharing agreements. China domestic competitors—many of them spinoffs from state-owned enterprises (SOEs) or joint ventures controlled by SOEs—at first produced low-cost gear of inferior quality. But as SOEs outcompeted foreign firms by leveraging production economies of scale with tech transfer quality improvements, supply chain product designers increasingly “sought to prototype more cutting-edge equipment in China.”
Despite the Sino-U.S. trade war shrinking exports to push China into its first negative balance of payments in 25 years, Beijing cut taxes by $163.7 billion (1.17 trillion yuan) in January and another $70.8 billion (506.5 billion yuan) in June to steady employment.
USCC’s analysis found that China was able to avoid violating the national deficit target of 2.8 percent of GDP by cost-shifting to local governments the burden of continuing to fund expanding infrastructure spending with less revenue. As a result, local government ran a $17.3 billion (123.4 billion yuan) deficit in the first half of 2019.
To fund spending, the Chinese regime approved a total of $306.6 billion (2.19 trillion yuan) special purpose bonds (SPB) for local governments to fund specific projects. To further boost local construction activity, China regulators adjusted infrastructure financing rules in June 2019 to count special bond revenue as equity. By eliminating the treatment of SPBs as debt, Chinese banks can further leverage project financings.
USCC warns the “policy strategy” is creating challenges for local government balance sheets, which are now caught between fiscal stimulus and tax cuts. As a result, every province, except Shanghai, expanded their budget deficit in the first half of 2019, compared to 2018. Revenues contracted in 11 provinces and decelerated in 12 others.
For Guangdong, which has the largest provincial budget and is China’s least debt-laden province, tax revenue growth decelerated from 13.3 percent year-on-year in the first half of 2018 to 2.4 percent versus last year; while expenditure growth accelerated from 3.4 percent to 13 percent.
Guangdong has joined other provinces in selling off or leasing state-owned assets to raise extra revenues. According to Chinese business and financial journal Caixin, Guangdong sales generated $5.6 billion (40 billion yuan), up 65 percent over the same period last year.
Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with more than 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.