Janet Yellen’s China visit went with a clear agenda: Accusing China’s excess of capacity. As most can understand, the underlying accusation is China’s dumping, especially in several key areas, including electric cars and solar panels. These are the weaker areas for the U.S. (and also Europe), either lacking price competitiveness or being monopolized by China (China has lots of key patents in the products mentioned above). Objectively speaking, a few areas of trade cannot take up much of the total market share, and in fact, they only make up a single-digit level.
The “dumping” in these areas is not new but has lasted for some years. However, when the U.S. and Europe were suffering from high inflation, they did not “too mind” any dumping in low prices, which helped bring inflation down. As inflation eased near to its target of 2 percent, the policy (political) priority of low inflation is lower. At the same time, the threat to local manufacturing becomes more vivid, especially as national elections are approaching. While the U.S. auto industry is taking up only about 1 percent of total employment, it has been contributing over 3 percent of the total GDP.
To evaluate the overall true impact of dumping, the very macro data actually tell the story. Trade value, like many other key macro quantities, rises over time. Thus, merely looking at the trade value or even the deflated trade volume will not help to understand the overall picture. Even taking a standard change-form like year-over-year (YoY) will not help either, because most macro variables of the same country (like GDP YoY vs exports YoY) commove. For many macro variables, each commoves across many countries (like the U.S. and EU GDP YoY).
One trick to identify key differences across countries is to compare the ratios. In our case, here we compare the ratio of U.S. exports to China to U.S. total exports, with that of U.S. imports from China to U.S. total imports. In the accompanying chart, these two series are plotted in blue and red, respectively, where the difference between the two ratios is shown in green.
The ratio tells how important China is (to the U.S.). The first clear observation is the U.S. has been exporting a stable share to China over time, yet the import share has turned upside down between 2015 and 2018. Based on linear extrapolation of the difference, the gap is expected to close in two years. This means that, by then, U.S.-China trade will be roughly balanced. Since the U.S. has been buying less from China, the dumping argument is likely invalid; at least we do not find it effective, as otherwise, the U.S. should be buying more instead.
The dumping argument is obviously an excuse to suppress China’s exports. Nevertheless, in a capitalist world, it is often those who have economic power who set the game rules. If China does not step back, it will likely face some sanctions or tariffs, and the outcome could be even worse. The loser has been written on the wall.
