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The Trade Deficit with China Hit a New Record, and That's OK

January 15, 2019 in Economics

By Daniel J. Ikenson

Daniel J. Ikenson

In President Trump’s reckoning, international trade is a
zero-sum game with distinct winners and losers. Exports are Team
America’s points. Imports are the foreign team’s points. The trade
account is the scoreboard, and the deficit on that scoreboard
proves that the home team is losing at trade. Accordingly, the
president considers blocking imports and promoting exports to be
integral to effective trade policymaking.

In 2018, Trump put that theory to the test. For a variety of
reasons, including a desire to reduce the trade deficit, Trump
imposed tariffs on $250 billion of imports from China.

According to the latest official Chinese data, the result was a
record-high bilateral U.S. trade deficit of $323 billion. Oops.
What happened?

The trade deficit is not
a function of trade policy, which is okay because neither is the
U.S. trade deficit a problem to fix. It’s just a benign

First, despite the existence of broadly applied tariffs, the
value of U.S. imports from China still increased by 11.3 percent in
2018. Although one would expect tariffs to raise U.S. prices and
induce consumers, businesses, and the public sector to purchase
less from China, a confluence of factors were at work mitigating
the impact.

For example, the strong U.S. economy, which was occasioned by
meaningful wage growth in 2018, probably offset some of the price
effects of the tariffs. With rising incomes, we can afford higher

Meanwhile, for many U.S. producers whose supply chains run
through China, the short-term costs of finding new sources in other
countries or repatriating production to the United States were
probably too high in most cases to cause a large shift in 2018
consumption patterns. In other words, enduring the tariffs may cost
less than the investments needed to avert them.

Another factor to consider is that a slowing economy in China,
marked by declining domestic prices and a weakening Chinese
currency, may be pushing Chinese export (pre-tariff) prices down,
blunting further the dissuasive effects of Trump’s tariffs. Of
course, the sluggish Chinese economy also helps explain another
major contributor to the rising trade deficit: stagnant U.S.

While U.S. imports from China rose 11.3 percent, U.S. exports to
China, which were subject to comparable, retaliatory Chinese
tariffs, registered a mere 0.7 percent increase. When economies
grow, demand for domestic and imported goods and services tends to
rise. When economies contract, or when growth slows, demand for
both tends to subside. Beyond the slowing Chinese economy, there
are a variety of other explanations for stagnant U.S. export

Among the major U.S. commercial targets of China’s retaliatory
tariffs are industries in the agriculture and energy sectors.
Products such as soya, rice, wheat, …read more

Source: OP-EDS

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