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Record U.S.-China trade gap may signal slower global growth

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Kim Jong Un visits Beijing amid U.S.-China trade talks 03:46

President Donald Trump and his economic advisers focus on trade deficits when it comes to China, and Mr. Trump has said a trade war would be "easy to win." But trade relationships — and their impacts — are far more complex.

Chinese data released overnight show the trade gap between the world's two largest economies was at a record high in 2018, and it may signal a broader global economic slowdown, according to economists. An alarming point in the latest Chinese trade data was a slowdown in the country's exports in December, shrinking by 4.5 percent to $221.2 billion, while imports declined 7.2 percent to $164.2 billion.

That led global stock markets to slide in Monday trading as fears mounted that global growth is slowing. In the U.S., the S&P 500 lost 0.5 percent, and the Dow industrials fell 0.4 percent.

Here's a rundown on what the latest numbers show.

Record trade gap

China's 2018 trade surplus with the U.S. surged to a record $323.3 billion. That means the U.S. purchased that much more in goods and services from China than it shipped to the country.

Mr. Trump's trade war with Beijing may be starting to take a toll both at home and in China, even though the White House is holding back on additional tariff measures until March while the two sides try to negotiate a trade deal. U.S. and Chinese officials ended a three-day negotiating session last week with no sign of agreements or word on what their next step would be.

But penalties of up to 25 percent already imposed on billions of dollars of each other's goods remain in place, raising the cost for American and Chinese buyers of soybeans, medical equipment and consumer goods, from purses and bicycles to furniture and tech gear.

Tariffs are taxes paid by companies, not countries, to import goods and services. Yet tariffs are just one of the many factors in China's slowing growth, economists at Capital Economics wrote in a note to clients. They estimate a cooler Chinese economy could cut about 0.2 percentage points off global GDP in 2019 compared to the 2018 pace. Other experts have pointed to a potential hit to the U.S. economy from the current partial government shutdown.

"Admittedly, U.S. tariffs may have played a small part in the sharp fall in China's export growth last month," the Capital Economics economists wrote. "But growth in exports to the rest of the world also slowed significantly, indicating that softer demand was the main culprit, and that a trade truce with the U.S. would be no guarantee of a strong recovery."

"The trade figures were another sign that growth in the global economy is slowing too," weighing on stocks, the Capital Economics wrote. It expects economies in Europe and the booming U.S. to slip this year.

What does it mean for the U.S.?

In the U.S., consumer spending accounts for roughly 70 percent of economic activity. American households also save far less than their counterparts in Europe and Asia. The personal savings rate among Americans has hovered at less than 5 percent for years as their spending has boomed, according to the Federal Bureau of Economic Analysis.

"An overwhelming majority of economists point to the high consumption levels and low savings rates in the U.S. as a major determinant of large U.S. trade deficits in general, and China in particular," Michelle Casario, an associate professor at Villanova University, said in an email to CBS MoneyWatch.

Tax cuts passed signed into law in late 2017 by Mr. Trump likely gave the U.S. economy a quick lift last year by boosting disposable income. That means Americans are spending even more, while the tax cuts are ballooning the U.S. budget deficit. That could have consequences down the line as the pace of spending will likely slow as the impact of the tax cuts fades.

"The Trump tax cuts not only increased the budget deficit, they also increased disposable income, at least for now, which increases consumption," Casario said. "The irony here is that the tax cuts indirectly increased the trade deficit, which has been at the center of Trump's policy agenda."

Unless the large federal budget deficit shrinks and the low savings rate rises, "the U.S. will continue to experience the world's largest trade deficit," Casario said. "Tariffs do not reduce trade deficits, they simply reduce (or have the potential to reduce) trade flows. The asymmetries in trade will persist."

Year-end stockpiling may also be a factor

Another reason for the trade deficit's jump last year is that U.S. firms may have hiked their imports of Chinese goods in reaction to Mr. Trump's threat to increase tariffs before he postponed them until March in a December decision.

Some companies have shifted production of goods bound for the U.S. from China to avoid U.S. tariffs. Others are lining up non-Chinese suppliers of industrial components and may have rushed to get some in hand before year-end.

"In anticipation of tariffs, U.S. firms increased their orders from China to avoid the higher costs of imports," Villanova's Casario said. "This may continue as U.S. businesses are concerned that Trump will increase the tariffs on the most recent $200 billion from 10 percent to 25 percent, and/or levy tariffs on an additional $250 billion."

At the same time, Chinese leaders are trying to reduce the country's economic reliance on trade and stoke self-sustaining growth based on domestic consumer spending. But their plans call for keeping exports stable to avoid politically dangerous job losses.

Mr. Trump could use the latest trade deficit report "as ammunition" to boost tariff rates or add new ones after the March 1 truce deadline, Casario said.

As China's growth slows, it's investing less in the U.S.

Chinese direct investment in the U.S. plummeted to $4.8 billion last year after a steep decline in 2017 to $29 billion, itself a sharp drop from a record-high $46 billion in 2016, a report released over the weekend from Rhodium Group shows.

Past free-trade agreements gave foreign companies incentive to invest in the U.S., typically in manufacturing and in startup companies. That created more U.S. jobs. But imposing tariffs can make it difficult for a country and its companies to invest in the U.S.

Policies such as how the U.S. uses the Committee on Foreign Investment in the U.S., known as CFIUS, to more tightly examine transactions with Chinese companies pushed abandoned deals to an all-time high, the Rhodium report said.

"On top of that," it said, "trade barriers and a generally more confrontational stance toward China have created tremendous uncertainty for Chinese companies in the U.S., dampening investor appetite and increasing the risk perception of U.S. sellers."

The Associated Press contributed to this report.

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