Americans continue to trade robustly with the rest of the world, according to this morning’s monthly report from the U.S. Commerce Department. The escalating tariffs imposed by the Trump administration have put a big dent in U.S. trade with China, but that has only diverted trade elsewhere, and meanwhile Americans continue to pay a mounting tariff bill to the federal government.
One of the big reality checks for the Trump administration in the report on trade through August is that the US trade deficit is stubbornly resistant to modification by tariffs. When President Trump took office, one of his biggest economic goals was to reduce and eliminate the US trade deficit with the rest of the world, starting with the huge bilateral deficit with China.
The trade report certainly confirms that the escalating tariff war with China has curbed the bilateral US goods deficit between the two countries. Year-to-date, U.S. merchandise exports to China are down by $13.4 billion, but imports from China are down by an even larger $43.2 billion, reducing the bilateral deficit with China YTD by almost $30 billion. Yet the US trade deficit with the rest of the world continues to climb.
As the Commerce Department report itself summarizes, “Year-to-date, the goods and services deficit increased $28.3 billion, or 7.1 percent, from the same period in 2018. Exports decreased $3.2 billion or 0.2 percent. Imports increased $25.1 billion or 1.2 percent.” The decline in the bilateral deficit with China has been more than offset by the rise in bilateral deficits with other major U.S. trading partners such as Mexico, the European Union, Switzerland, and Taiwan. (See Exhibits 14 and 14a.)
The latest trade report confirms again the enduring economic fact that the overall trade balance is not determined by the sum of bilateral balances, but by the underlying macroeconomic levels of savings and investment in the US economy. Without a change in those macro factors, changes in the bilateral balance with one trading partner will simply be offset by changes with other partners. The Trump administration is playing the trade version of whack-a-mole: it can beat down the bilateral trade deficit with China with its ill-conceived tariff war, but the deficit will just pop up elsewhere—the EU over here, Mexico over there!
Another sober reality from the trade report is that Americans are paying an ever-rising tax bill to the government in the form of customs duties. Collections in August reached $6.5 billion, or $66.4 billion during the previous 12 months. (See Supplemental Exhibit 1.) The total is more than double the $32 billion or so the government was collecting annually in 2016 and 2017 before President Trump began hiking tariffs on solar panels, washing machines, steel, aluminum, and imports from China. With duties on Chinese imports set to expand further on October 15 and again on December 15, those collections will continue to rise. And studies have confirmed that American importers and consumers are bearing the cost of those increased duties.
Finally, the trade report offers a timely reminder that, for all the attention on China, it is the European Union that is America’s top trading partner. Through the first half of 2019 (see Exhibit 20), the European Union was the leading market for U.S. exports of goods and services. U.S. exports to the EU ($298.6 billion) far outpaced exports to Canada ($180.1 billion), Mexico ($148.0 billion), and China ($83.5 billion). The EU was also the leading source of imports of goods and services to the United States ($361.1 billion), far ahead of China ($245.0 billion), Mexico ($197.1 billion), and Canada ($179.5 billion).
That fact is timely because this week the Trump administration signaled its intention to impose duties on $7.5 billion in imports from the EU in retaliation for its subsidies to aircraft manufacturer Airbus. The duties have been authorized by the World Trade Organization, and will likely be followed by similar retaliation from the EU early in 2020 in response to U.S. subsidies to Boeing.
That trade action will likely be contained because it is occurring within the rules set by the WTO. But if President Trump decides in November to use Section 232 of US trade law to impose completely unjustified and unilateral duties on imported autos, it could launch an all-out trade war with the European Union that would rival the damage and disruption from the ongoing tariff war with China.
Photo by Dan Kb