The Smoking Gun
Excessive military expenditure is a major cause of the U.S. trade deficit
By Mei Xinyu  ·  2018-07-18  ·   Source: | Web Exclusive

U.S. soldiers stand guard near an airstrike site in Afghanistan on April 15, 2017 (XINHUA)

Immediately after the U.S. tariffs on $34 billion of Chinese products took effect on July 6, China applied reciprocal tariffs on U.S. products of the same value. The most valuable trade war in economic history has thus officially begun.

There seems to be little logic in the U.S. decision to initiate a trade war, since it is now at the peak of its cycle of economic prosperity. The United States is currently in a state of full employment, so protectionist measures cannot increase employment in the country, but will instead cause unanticipated obstacles for the U.S. economy. Even the country's trade deficit, considered by President Donald Trump as reasonable grounds for a trade war, is not caused by "unfair trade practices" of China and other trading partners of the United States, but is partially a result of its own problems, including the astronomical military expenditure.

Military expenditure and trade deficit are closely related. At the macroeconomic level, the U.S. trade deficit is essentially caused by a low national savings rate, which itself comes about as a result of the military and social security expenses of the U.S. Government. The unbridled expansion of military expenditure is the biggest drain on the U.S. federal budget, which contributes significantly to the country's trade deficit.

War and peace

Any disproportionate increase of military expenditure will have a detrimental effect on U.S. industry and trade. During peacetime, excessive spending and generous contracts have lured many U.S. companies to invest too many quality resources in the military, affecting the development of civilian industries. Consequently U.S. civilian industries have become less competitive in the international market, and some have even lost a considerable share of the domestic market.

If a major war were to break out, the sudden increase in military orders would inevitably see many obtained by foreign contractors, while foreign industries of other kinds would secure orders of civilian products as U.S. domestic producers transferred to military production. This would further expand the U.S. trade deficit.

There are several examples in history of major wars that seriously affected U.S. international payments, and greatly boosted the industrial and export growth of economies regarded by the United States as its manufacturing rivals.

The United States had a surplus in the trade of goods worth $4.57 billion and $4.51 billion in 1948 and 1949, the years preceding the Korean War. In 1950, the year war broke out, this surplus reduced sharply to $362 million. In 1954, a year after the end of the conflict, the surplus increased to $1.71 billion. Huge U.S. demand for military supplies throughout the war rescued Japan from economic depression after World War II.

In 1965, the first year of the war in Viet Nam, the U.S. trade surplus in goods shrank to $3.51 billion from $5.38 billion in the previous year. As the war intensified, the United States began to suffer a deficit in the trade of goods, which stood at $1.29 billion in 1968 and $980 million in 1969. Since then the United States has largely maintained a trade deficit, with the exception of 1975, when the end of American involvement in Viet Nam brought with it a trade surplus of $2.98 billion.

During the Viet Nam War the Four Asian Tigers--the Hong Kong and Taiwan regions of China, Singapore and South Korea--maintained rapid economic growth and industrialization through export-oriented economic models, benefitting from the shift by American civilian industries toward military production.

In 2001 the United States dispatched troops to Afghanistan and in 2003 to Iraq. In 2002, one year into the war in Afghanistan, the U.S. trade deficit in goods surpassed $500 billion for the first time, soaring by $57.1 billion from the previous year to reach $507.1 billion. In 2004, the year after conflict broke out in Iraq, the U.S. deficit in trade of goods jumped to $710.8 billion from $578.3 billion the previous year and in 2005 broke more records by reaching $831.6 billion.

Cuts must be made

If the United States does not reexamine its propensity for excessive military intervention overseas, nor significantly reduce its swollen military expenditure, then it will not be possible for the country to effectively reduce its trade deficit.

Trump understands this well. In a foreign policy address on April 27, 2016, during his presidential campaign, Trump said, "Unlike other candidates for the presidency, war and aggression will not be my first instinct. You cannot have a foreign policy without diplomacy. A superpower understands that caution and restraint are signs of strength… Although not in government service, I was totally against the War in Iraq, saying for many years that it would destabilize the Middle East. Sadly, I was correct."

The 2017 National Security Strategy report, the first issued by the Trump Administration, defined four vital national interests as protecting the homeland, the American people and the American way of life, promoting American prosperity, preserving peace through strength and advancing American influence.

The focus of these interests suggests that Trump is attempting to reduce the exhaustion of American resources in expensive military operations abroad. If implemented, this will certainly help reduce the U.S. trade deficit, but by simultaneously advocating the massive upgrading of U.S. military hardware and increasing military spending, Trump is offsetting the potential positive effect of his policies.

In 2018 the global defense budget will total $1.67 trillion, up 3.3 percent year on year and the highest in the post-Cold War era. Of that total, 40 percent will be spent by the United States, according to IHS Jane's, while U.S. GDP accounted for only 15.4 percent of the world total in 2017, according to the International Monetary Fund. The potential impact of such a massive defense budget on the national savings of the United States and its balance of trade is clear; the United States must cut its military expenditure if it is to reduce its trade deficit.

(The figures used in this article are from the United Nations Conference on Trade and Development unless otherwise stated)

The author is an op-ed contributor to Beijing Review and a researcher with the Chinese Academy of International Trade and Economic Cooperation

Copyedited by Laurence Coulton

Comments to zhouxiaoyan@bjreview.com

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