Why the U.S.-China Trade Deficit Keeps Growing Despite Trump's Tariffs

Economy 20:19 17.11.2018

One of the great ironies of the U.S.-China trade war is that, since March, when president Donald Trump began slapping tariffs on Chinese imports, America’s merchandise trade deficit with China has grown bigger, not smaller.

As Financial Times’ Gillian Tett points out in this excellent column Friday, America’s September merchandise trade deficit with China jumped 4.3% to a seasonally adjusted $37 billion—a record high. The increase reflected an 8% rise in U.S. imports from China, while U.S. exports to China remained flat. And that wasn’t a monthly blip. In the third quarter, America’s deficit with China soared to $106 billion, up from $93 billion in the same period last year. For the year to September, America’s trade deficit with China has ballooned to $305 billion, up from $276.6 billion last year.

What’s going on? Tett ticks through the reasons for the widening gap: the U.S. economy is firing on all cylinders and sucking in more Chinese imports as it grows; the cost of tariffs have been offset by a weaker Chinese currency; American companies are stockpiling imports ahead of the threat of even higher tariffs. She also cites the explanation of Soren Skou, chief executive of AP Maersk, one of the world’s largest shipping companies: “Chinese companies…find it a lot easier to source substitutes for American products than the US does in replacing Chinese imports.”

Tett’s column sports a click-bait headline: “China is winning the trade war with America for now.” But those last two words are a significant hedge. The rising deficit with China is probably a short-term phenomenon, and seems unlikely to persist if Trump follows through with his threat to extend tariffs to all Chinese imports and raise rates from the current 10% to 25% should the two nations fail to reach a deal before the end of the year. Even so, growth in the U.S. deficit so far demonstrates, as Tett notes, “how hard it is to predict the precise consequences of a trade war.”

As for the likelihood of the two nations reaching a trade deal, the odds don’t seem to have improved much over the last few days. China has floated a list of compromises it’s willing to consider ahead of the Group of 20 summit in Buenos Aires later this month when Trump and Chinese president Xi Jinping are set to meet for dinner. But Trump has dismissed that list as “not acceptable.” On Saturday, Xi, speaking at the Asia Pacific Economic Cooperation (APEC) forum in Papua New Guinea, declared that a trade war would produce “no winners“—but he offered no indication China is willing to make further concessions. US vice president Mike Pence, filling in for Trump at the APEC meeting, gave no quarter. The U.S. “will not change course until China changes its ways,” he declared. Pence also attacked Xi’s signature “Belt and Road” initiative and warned Asian nations to shun loans from China that could compromise their sovereignty.

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