The current trade war between China and the United States represents both a headwind for global economic growth and an overhang in the equity markets. A myriad of factors has driven the U.S. and China to this point, but there are two main issues that the U.S. Government is targeting: its large trade deficit with China, as well as concerns surrounding the transfer of intellectual property, state secrets and technology through espionage.
The U.S. current account balance has been persistently negative since around 1980 as can be seen in Figure 1 below. Given that the current account mainly reflects the balance of trade, it highlights the relative size of net imports when compared with GDP. About half of the current account deficit is with China, while 20% is with the European Union and 10% is with Mexico. The U.S. is able to finance its trade deficit through its Capital Account. It’s able to issue treasury bonds based on its status as the global reserve currency (given that foreign governments and investors alike purchase U.S. Treasuries based on their liquidity and stability). This allows the U.S. Treasury tremendous leeway in financing its large deficits and the additional liquidity required for banking operations.
Figure 1: U.S. Current Account Balance as % of GDP.