Over the weekend, an op-ed by David Dodwell, executive director of the Hong Kong-Apec Trade Policy Group, about the Trump administration’s current investigations into Sino-American trade and the potential for a trade war between the United States and China was published by the South China Morning Post. Dodwell pointed out that the cost to the United States would be substantial, pointing in particular to Chinese tourism to the United States. While his conclusions are generally on point, Dodwell’s focus on Chinese tourism, how it would be impacted by a trade war and its importance to the U.S. economy, is largely incorrect.
At the heart of the “looming” trade war with China, is a fundamental misunderstanding of how trade functions. It’s clear that Donald Trump views trade as a zero-sum game. In his mind, because the value of the goods and services the United States imports from China is greater than the value of the goods and services China imports from the United States, the United States is “losing” in terms of trade.
China is robbing us blind in trade deficits and stealing our jobs, yet our leaders are claiming 'progress' http://t.co/2r9DHxHo SAD!
— Donald J. Trump (@realDonaldTrump) December 20, 2012
Trump’s take on the U.S. trade deficit with China ignores the substantial benefits that both the United States and China derive from bilateral trade. For U.S. consumers, Chinese goods substantially decrease cost of living and contribute to the relatively high standard of living enjoyed in the United States. Moreover, China is already a substantial importer for the United States, which helps drive economic growth and employment opportunities.
When discussion a potential trade war between the United States and China, tourism is not especially significant
Tourism is a factor in this discussion with the estimated $33 billion in Chinese tourism spending in the United States. However it’s important not to overstate the influence of Chinese tourism in this regard.
A trade war with China would undoubtedly negatively impact Chinese tourism to the United States and China has grown accustomed to utilizing tourism diplomacy to affect the behavior of other states. But Chinese tourism to the United States is also substantially different in nature compared to Chinese tourism to South Korea or Taiwan. Chinese tourists to the United States tend to be wealthier and often travel independently.
A “travel ban” or the banning of the sale of group tour packages, like that used by Beijing to punish Seoul over the THAAD dispute, would have little impact on the more profitable independent Chinese tourists that come to the United States. Moreover, the current “Trump slump” in U.S. tourism appears to have had little impact on Chinese tourism to the United States.
Of course, if anger with American trade policy in China is significant enough, it could very well discourage Chinese tourism to the United States, even if Chinese trade or tourism policies won’t.
The nature of Chinese tourism to the United States reduces the potential effectiveness of Chinese tourism diplomacy
Moreover, as we at Jing Travel have previously pointed out, the actual financial benefit of Chinese tourism in the United States is likely overstated. Part of the $33 billion Chinese tourists spend in the United States is likely disguised real estate investments, purchases of annuities, and purchases of insurance, among other things.
The reduction of this kind of spending would only be a good thing for U.S. tourism stakeholders as it would provide clarity into the actual spending numbers of Chinese tourists. The amount of lost tourism revenue would likely be less than what the numbers imply.
Finally, some experts believe that soybeans and aircraft would be the main targets of the Chinese government in the event of a trade war, not tourism.
In short, tourism should not be a primary consideration in this discussion. In fact, the tourism spending numbers of Chinese tourists in the United States should warrant increased scrutiny about trade relations between the United States and China.
Based on these assertions, Dodwell’s focus on tourism in voicing his opposition to a trade war between the world’s two largest economies is incorrect. However, there are factors that illustrate that a trade war with China would be generally harmful for the United States.
The U.S. trade deficit has less to do with unscrupulous business practices in China, and more to do with the respective natures of the U.S. and Chinese economies. The United States economy is driven primarily by consumption.
Nonetheless, the United States does have an arguably high, overall trade deficit at an estimated total of $513.578 billion for January to November 2017, when accounting for both goods and services. The United States maintains a negative trade balance in terms of goods at $737.386 billion for the same period, but a positive trade balance for services at $223.808 billion.
The U.S. trade deficit with China is more about the nature of the U.S. economy than about the behavior of Chinese firms or Chinese government policies
However, this has less to do with China than it does with the entire U.S. economy. In fact, there are few economies around the world that the United States has a positive trade balance with.
If Donald Trump’s frustration over the Sino-American trade imbalance was simply an issue of trade, then he should be similarly irked with the European Union, Canada, or Israel. Although he has expressed his distaste for NAFTA and the Canadian and Mexican trade imbalances, these complaints are much less prominent than those he has made regarding Sino-American trade.
China on the other hand is an economy in transition. Chinese consumer spending is an increasingly important growth driver and the Chinese government has been keen on transforming China into a more consumption oriented country. Nonetheless, consumer spending as a percentage of GDP is on the decline, at least in the short term.
Furthermore, labor prices in China still don’t allow for China to be a primarily consumption oriented economy. With per capita GDP still relatively low, the Chinese economy will struggle to compete in terms of imports, on a per capita basis, with developed countries. On the other hand, China can still produce goods and services at substantially lower prices, although this is changing rapidly. All in all, China is still best suited for utilizing cheap labor to produce exports.
The trade deficit with China specifically should not be considered unnatural or unfair. It’s an understandable outcome of how both the U.S. and Chinese economies function.
A trade war with China would not only hurt American consumers, but also likely fail to address the trade imbalance
If Trump is serious about improving the amount of U.S. exports and its trade balance, then his administration should focus on gearing the U.S. economy to double down on what it does best: exporting services and skills by improving access to and quality of education and ensuring that more skilled foreign talent comes to the United States to work for U.S. companies. Promoting punitive measures against the Chinese economy, while arguably fair to some extent, will not address the U.S. trade imbalance and will likely harm American consumers.
Improving the viability of manufacturing in the United States certainly isn’t a bad thing, but there a multitude of countries around the world more than able to partly fill the vacuum China will leave as it eases into a more consumer oriented economy. India in particular stands out with its abundance of cheap labor, even if its industrial infrastructure and equipment isn’t quite there yet.
Put simply, the United States benefits substantially, from an economic perspective, by taking advantage of the Chinese labor market. Generally speaking, China is not robbing the United States, although China’s protectionist trade policies and intellectual theft are arguably unfair and shouldn’t be ignored. However, the 45 percent tariff that Donald Trump once considered/is considering is also a gross overreaction. It would prove damaging for both China and the United States. Fortunately for tourism in the United States, a trade war, at least in terms of Chinese policy, will likely not impact the industry much.