In the decades following World War II, China became both the United States’ largest trading partner and its greatest source of trade imbalance. What had originally started in the 1970s with small economic engagement, has since transformed into a highly contentious and incredibly nuanced trade relationship. As of 2022, the U.S shared a $382.1 billion with China, that has since decreased to $295.4 billion in 2024 however. Like all geopolitical topics, the trade deficit the U.S has with China is incredibly intricate and in order to better understand how this deficit developed, historical context is important as well as an understanding of power dynamics. This article will examine those historical forces that drove this trade deficit and the economic and political impacts.

The term “trade deficit” is generally referring three things, balance of trade in goods, balance of trade in goods and services, and broadly speaking balance on the current account. To put simply, the U.S trade deficit means that the U.S consumes more than it produces and imports more than it exports. Due to the current macroeconomic policies, we must rely on other countries such as China to recoup our imbalance. The result is a boost in U.S consumption which leads to more imports but ultimately continues to broaden the trade deficit.  

Brief Historical Timeline

• Post-WWII to 1970’s: Cold War, Rise of Communism

  1945-1949: U.S-China relations degraded due to Chinese Civil War – Loss of Chiang Kai-Shek to Mao Zedong. Communist Party takes over and U.S maintains relationship with Republic of China (Taiwan) and refuses to acknowledge People’s Republic of China (PRC). Cold War tensions, particularly a disdain for Communism caused economic relations to deteriorate.

  1950-1953: The Korean War, which led to full trade embargos against China and ultimately cutting all economic ties. Throughout the 1960’s China adopted isolationist policies (Mao’s policies such as the Great Leap Forward and the Cultural Revolution)

• 1970s – Trade Reopening

  1972: The Nixon Administration opens up relations which Nixon visiting China.

  1976-1978: Mao Zedong (remained de factor leader) until his death and succeeded by Hua Guofeng and Deng Xiaoping in 1978.

  1979: The U.S and China establish formal diplomacy under Jimmy Carter. Deng Xiaoping, a more pragmatic leader opens trade to other countries. This created a shift towards market oriented economic policies. China was declared most favored nation (MFN) under Jimmy Carter’s Proclamation 4697.

• 1980s – Establishment of Trade Deficit

  Early 1980s: “Special Economic Zones” (SEZs) were created in coastal areas to preferalize trade, administered through Deng Xiaoping’s economic policies. This led to more foreign investment and shipment to emphasis on exports. U.S companies began sourcing goods from (predominantly textiles and electronic industries).

  Late 1980s: The trade imbalance began more evident and started growing rapidly as China became a hub for U.S firms to get low-cost labor. (See macro trend 1985)

• 1990s: Exacerbation of Trade Deficit

  1989- 1990: Briefly suspended MFN status due to Tiananmen Square incident but restored in 1990 purely due to economic interest (low-cost labor).

  Mid 1990s: This allowed China to exponentially increase their industrialization capacity, which further increased U.S dependability on Chinese imports.

  2000: U.S granted China “Permanent Normal Trade Relations” (PNTR), which under US-China Relations Act of 2000, allowed for preferential tariff treatment. This was to encourage China to adopt fair trading practices.

• 2001-Present: WTO Entry & Trade Boom

  2001: China joins the World Trade Organization (WTO), which is an international organization that deals with the rules of trade between nations. Upon joining the WTO, China accelerated their trade and created a massive influx of Chinese goods to the U.S.

  Mid-Late 2000s: An increase of U.S firms offshoring, also known as the practice of relocating manufacturing from the U.S to a low-cost country. Doing so has severely increased the trade imbalance.

  2018-2024: Reached $419 billion trade deficit with China, sparking concerns over unfair trade practices. Subsequent tariffs implemented by Trump Administration. Talks of revoking PNTR status from China. Trade deficit gradually lowering, showing $295.4 billion in 2024.

  2025: Trump Administration implemented 10% tariffs on imports from China, sparking China to retaliate with 15% tariffs on U.S goods totaling $14 billion.

Trade Deficit Historical Breakdown

After World War II, U.S. and China economic relations were very limited due to the polar ideological differences between capitalism and communism. When the Chinese Communist Party took over in 1949, the U.S. completely severed ties. It later placed full trade embargoes during the Korean War (1950-1953). Thereafter, and for roughly 20 years, China adopted Mao’s isolationist policies (as seen with the Cultural Revolution and the Great Leap Forward). This changed when President Richard Nixon and his administration opened the door with his visit to China in 1972. By 1979, the U.S. and China had established formal economic diplomacy. Additionally, Deng Xiaoping’s (Mao’s successor) policies led to a more market-driven economy. The U.S aligned with Xiaoping’s pragmatic approach to economics and granted China the Most Favored Nation (MFN) status in efforts to encourage trade growth.

In the 1980s, China created Special Economic Zones (SEZs); these zones were located in coastal areas such as Hong Kong and were given special financial and trade privileges. This quickly prompted an increase in foreign investment, particularly from U.S. firms who were seeking to cut labor costs and bypass regulations by offshoring. One consequence of capitalism is that it values economic efficiency over pretty much any other moral sensibility. By definition, entities under capitalism try to maximize gains and reduce losses when producing. As a result, U.S. firms increasingly turned to China to lower their manufacturing costs. Offshoring was the first domino that fell in an incredibly long line of dominos that further integrated U.S. and Chinese supply chains. By the 1990s, there was a dramatic expansion in trade due to China’s industrial capacity, which gave way to substantial economic growth for both parties. So much so that perhaps that has skewed our perception of economic interdependence? While I can only speculate, the U.S. historically has been inclined to favor its economic interests over any assertion of power in the name of democracy. An example of this was when the U.S. continued to engage economically with China following the Tiananmen Square incident. While it certainly was in our best interest to continue economic relations, perhaps this was the first clear sign of economic dependence?

In 2000, President Clinton granted China “Permanent Normal Trade Relations (PNTR), another term for MFN. This was China’s golden ticket into admission into the World Trade Organization (WTO), which happened in 2001. China’s entry into the WTO was absolutely a turning point for this relationship. It flooded the U.S. market with Chinese goods with little to no trade barriers. By the mid to late 2000s, offshoring picked back up again, and our trade deficit began to grow exponentially. There are certainly some concerns about this; while U.S. firms enjoyed the low production costs, lower wages, and minimal regulation, it wasn’t without a cost. Some of China’s trade policies favored only themselves and were practiced unfair trade policies such as currency manipulation (purposeful devaluation of the yuan to export at a lower cost) and intellectual property theft. By 2018, the deficit grew to a staggering $419 billion. From there, Trump implemented tariffs, which promptly started a trade war on over $360 billion worth of Chinese goods. [See our post “Tariffs and Power: Trump’s Trade War Breakdown” for a better breakdown.] Eventually, the 2020 “Phase One Trade Deal” tasked China with purchasing more U.S. goods, but it did not significantly reduce the trade imbalance. The Biden administration has since then kept many of Trump’s tariffs and has focused on reshoring important domestic industries. Now, in 2025, President Trump has implemented 10% tariffs on China and is seeking to take another crack at reducing our trade deficit. Perhaps the problem lies within enforcing policies or rather an unwillingness to walk away. The trend here seems to be the U.S. implementing policy, China not liking it, and that’s the end of it; there is no follow-up.

The Bottom Line

Power dynamics play an integral role in shaping the U.S.-China trade deficit; they influence everything from trade policies to economic dependencies and even geopolitical strategies. The key takeaway here is our economic leverage. It isn’t as straightforward as one might think; it’s asymmetrical. China’s rise as the world’s leading exporter created an economic power shift. Its ability to export goods at dirt cheap allowed the U.S. to heavily rely on China, deepening our deficit. However, China absolutely has a dependence on U.S. consumption. The power lies totally within American consumers to buy their products. This difference gives both nations leverage over one another. We should be forward-thinking and note which key industries within the U.S. are expected to see the most growth and ask ourselves how we can protect our position. The U.S.-China trade deficit is not just about economics but rather is a reflection of a broader power struggle between U.S. hegemony and the rise of an adversary.