The Trump White House has argued that its tariffs against China and other countries would not only provide needed government revenues but also would reduce the US trade deficit. In fact, to date, the evidence is quite the reverse.

Bear in mind that a fully employed, strong economy like the US often records deficits in the international trade of goods.

As long as the US Administration pursues large budget deficits in its fully employed economy, the trade will simply shift away from China to America’s other trading partners. With the American imports migrating to other higher cost circumstances, US consumers will be hit with the functional equivalent of a tax hike.

The world's two largest economies have already imposed hefty duties on one another's goods. Trump and many others have accused China of using unfair trading practices which account for the huge US trade deficits with China.

Not only does the US accuse China of stealing intellectual property, but the US also asserts that China’s economic policies unfairly favor domestic companies through subsidies. On a bilateral basis, the US trade deficit with China reached a lofty $419bn in 2018.

In fact, the trade dispute with China was one of a series of trade fights the US has waged with other countries over the past year. Trump has also imposed taxes on imports from Mexico, Canada, and the European Union, to encourage consumers to buy American products. These same countries have also retaliated with tariffs on US goods.

But as the following chart taken from a National Bank web site indicates (May 2, 2019), on a 12-month cumulative basis, the total American trade deficit in goods remains near an all-time high.

Although there is some evidence that imports from China may have been reduced, as predicted some US import demand may have been diverted to other countries. The IMF has labeled this effect the Trade Diversion Effect.

Indeed, in a clear rebuke to the Trump Administration, the April International Monetary Fund report indicates that countries looking to improve their trade imbalances should concentrate on issues in their own economies instead of turning to tariffs. This represented a clear and non-subtle rebuke to Trump’s views on international trade

As the second chart below indicates, while the trade deficit with China is falling (in large part due to tariffs), it is clearly being compensated with rising trade deficits with the rest of the world.

In closing, the US-China trade war is a source of great uncertainty for the financial markets and for the real economy. This uncertainty has contributed to the slowdown in global growth and global capital spending.

(Click on image to enlarge)

(Click on image to enlarge)

(Click on image to enlarge)