Vice President JD Vance is perhaps the sharpest of the senior officials in the Trump administration. His attempt to simplify the nature of exchange between China and the United States is simplistic. It reinforces the impression that no one in the administration knows any of the realities of international trade.
On the program “Fox and Friends,†the vice president said: “To make it a little more crystal clear, we borrow money from Chinese peasants to buy the things those Chinese peasants manufacture.â€
Very simple.
As in simple-minded.
That’s not how it works.
In reality, Americans get paid on the value-added that our labor provides to produce goods or services. Here.
Wage recipients then seek to exchange their earned dollars for other goods and services, including things whose final assembly is in (so the label says “Made inâ€) China.
What, then, do the Chinese who get the dollars (not some wage-earning “peasants†but businesses, managers, etc.) do with the money? They buy goods from the United States or anywhere else because the rest of the world is happy to trade in dollars. Alternatively, the holders of dollars invest them in stocks, bonds, real estate and other assets.
That’s the “loan†we get from China. Chinese investors want the highest return on those dollars, which is not achieved by lending us money to buy what we would buy anyway with our resources.
Instead, like any investors, the Chinese want to find the best opportunities to increase their wealth, such as American factories, resources and businesses. That, in turn, means increases in American employment and prosperity and allows us to buy stuff from each other and the rest of the world.
Vance also seems confused about the difference between a deficit and a debt. If we buy something from the local store with cash, we have a deficit with that store, but we don’t have a debt. That’s obviously true no matter what the store chooses to do with our money. If we buy more stuff from China than they buy from us, we have a deficit but no obvious debt. They can take the money, spend it, or leave it in a box if they wish, but it still doesn’t represent a debt.
Part of the problem with understanding U.S.-China trade and exchange is that Americans see a lot of “made in China†labels and assume an outsized role of China in the U.S. economy. When I was teaching, some of my students thought China’s U.S. sales represented as much as 50% of the U.S. gross domestic product.
The answer is less than 2%, and our bilateral trade balance — our trade deficit with China — is 1% of GDP.
The Trump administration has created a lot of hysteria around the trade deficit, especially the one with China, but it is wildly misplaced.
In the end, the only thing JD Vance makes “crystal clear†is that he doesn’t understand.
Peter Z. Grossman is an emeritus professor of economics at Butler University, in Indiana. He wrote this for InsideSources.com.
