The world's most important bilateral relationship — between the United States and China — is also one of its most inscrutable. Bedeviled by paradoxes, misperceptions and mistrust, it is a relationship that has become a source of considerable uncertainty and, potentially, severe instability. Nowhere is this more apparent than in the brewing bilateral trade war.
The key assertion driving the current dispute, initiated by U.S. President Donald Trump's administration, is that America's trade deficit is too big — and it's all China's fault. U.S. Treasury Secretary Steve Mnuchin has gone so far as to demand that China unilaterally cut its trade surplus vis-a-vis the United States by $200 billion by 2020.
Most sensible economists agree that America's trade deficits are the result of domestic structural economic factors, especially low household savings, persistent government deficits and the dollar's role as the world's main reserve currency. According to Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, if the U.S. wants to reduce its trade deficit, it should start by reducing its massive fiscal deficit.