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Despite the record unemployment rate, widespread hardship to businesses, strains on the healthcare system, political turmoil, and general disruption to daily life in 2020, US consumers have managed to ramp up their habit of buying things. Demand for physical goods replaced some of the previous demand for in-person service-related experiences and much of that demand was met with a surge of imports from China as domestic production slowed down due to lockdown measures. Up until recently, global supply chains managed to find their footing and could meet demand, but news has emerged that reveals stresses on the world’s shipping infrastructure and uncovers clues about the economic outlook.

Container Shortage and Chinese Exports

Global logistical networks recently began to suffer from a shortage of shipping containers as demand has suddenly risen. Freight rates from China to the US have jumped by 300%. The container situation has become so extreme that hundreds of thousands of containers have been sent off empty from US ports, mostly to China as exporters demand empty containers with increasing urgency. An estimated 177,938 containers, were rejected from loading US export items at the ports of Los Angeles and New York/New Jersey alone and then sent across the Pacific.

The recent imbalance of shipping containers illustrates the latest state of affairs surrounding the US and Chinese economies. As exports of consumer goods from Asia eclipse exports of mostly commodity and raw materials from the US—in this case, even blocking US agricultural exports from having shipping containers to reach foreign markets—the trade deficit between the two countries may become more important to these highly competitive economies.

When Trade Deficits Matter

The Austrian perspective on the US trade deficit has long been that given the continued relative productivity of the US economy, foreign desires to invest in the US, and demand for the dollar abroad, the trade deficit is a ‘pseudo-problem.’ The US competitive advantage vis-à-vis other countries in recent decades has made running a trade deficit highly probable and even favorable for Americans as they enjoy the consumption of cheaper imports.

Thus far, the parties involved have been satisfied with this arrangement as US consumers bring in goods at favorable prices and producers receive a reliably stable world reserve currency: the US dollar. However, the underlying conditions particular to the US economy in relation to China may be changing. There are two aspects of the US-China trade deficit that merit attention. The first is the effect of net consumption by the US coupled with dovish monetary and fiscal policies whereas the second is what China plans to do with US dollars accumulated through exports.

On the US side of the equation, easy money from the central bank coupled with fiscal stimulus extended to consumers has juiced buying activity as the lockdowns have forced people to stay home and spend. It’s no wonder that shipping containers are rushing to get back to China. With the US taking big hits to production and foreign investment in 2020, along with explosive increases in the money supply, critical questions arise regarding the nature of this trade deficit and how long the status quo can continue as the country pushes the boundaries of its exorbitant privilege. Indeed, the health of the dollar itself as it relates to trade deficits would be an indicator to watch in coming years.

In running a trade surplus with the US, China has traditionally exchanged its US dollars for US Treasuries to add to its balance sheet and to maintain its export advantage. In recent years, however, China has reduced its holdings in Treasuries. This trend has also coincided with massive spending on the part of China in the last decade on the Belt and Road Initiative (BRI) infrastructure and trade corridor project which involves 71 countries across Eurasia and Africa that encompass two-thirds of the global population and one-third of world GDP.

Given the continued global dollar demand, it would be shrewd for China to use accumulated dollars to acquire foreign assets and invest in projects that have the potential to generate future income. The trade war with the US in recent years has driven China to deepen its flow of trade toward surpluses with other emerging markets and forge strategic global relations.

As containers carry goods from China to the US and rush to return empty to bring more, the moment provides a glimpse into a potentially precarious arrangement between the two countries. While the US presently consumes itself into debt and liabilities, China has leveraged its productive surpluses from this relationship into increasingly influential assets that may strengthen its position and further challenge the US, and perhaps even the dollar itself.

Originally published by the Austrian Economics Center.

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