US reliance on China’s capital goods rules out decoupling

The bad news is that America hasn’t invested much in manufacturing during the past 20 years. The worse news is that most of the manufacturing capital equipment that America uses came from imports.

Not only does the US have a US$1 trillion trade deficit, but about $300 billion of that deficit comes from imports of capital goods, namely goods that make other goods.

Federal subsidies for chip fabrication plants and green energy have recently bulked up the numbers for factory construction, but orders for capital equipment remain depressed. The subsidy-driven increases in factory building help explain an enormous surge in US imports of capital goods.

America’s dependence on foreign capital goods reached an all-time high in 2022, as capital goods imports exceeded domestic production of capital goods for home use, according to Asia Times’ calculations.

To reduce its $1 trillion trade deficit, the US would have to invest in capital goods. But it would need to import most of these capital goods, which means that the trade deficit would have to increase in the short term in order to shrink in the long term.