Macroscope | Why a stronger yuan, not tariffs, may be Trump’s best hope to shrink US trade deficit

Neal Kimberley says the dollar’s strength has widened the trade deficit by making US exports more expensive and goods it imports cheaper, defeating a purpose of Trump’s tariffs

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The strength of the US dollar has been one of the biggest surprises of 2018, but not a welcome one for a US administration determined to lower its trade deficit with China. Photo: Reuters

Published: 1:03am, 12 Dec 2018Updated: 2:10am, 12 Dec 2018

US President Donald Trump may be a self-proclaimed “Tariff Man” but there’s no evidence from trade data that US levies on imports from China are eating into the size of America’s trade deficit. In fact, that deficit has soared again. A cheaper US dollar would probably help the situation but, for that to occur, it might need yuan strength to lead the way.

In spite of, or perhaps influenced by, US tariffs on imports from China, the US trade deficit hit a 10-year high in October. The median forecast of economists polled by Bloomberg had been for a figure of US$55 billion but the data released on December 6 showed the actual number was US$55.5 billion.

That US$55.5 billion figure represented a rise of 1.7 per cent from September’s US$54.6 billion, a figure which itself had been revised up from the original US$54 billion. The keynote US goods trade deficit with China jumped to a record US$43.1 billion in October, up 7.1 per cent from September’s US$40.2 billion.

The deterioration in China-US trade relations, and particularly Washington’s resort to tariffs, must surely explain at least part of the increase, with Chinese exporters front-loading shipments to avoid such imposts. In mid-September, the Trump administration not only announced a new 10 per cent tariff on US$200 billion of Chinese goods but also that it would rise to 25 per cent on January 1.

The fact that the tariff escalation has now been put on hold to allow for 90 days of China-US trade negotiations doesn’t mean it has been taken off the table. China’s exporters might rationally choose to use that 90-day window to keep front-loading cargo shipments into the United States.

Of course, there would be no point in Chinese exporters acting in such a way if there were no real expectation of selling those goods in the US market. It might not go down well in the White House but it may be that US demand for Chinese goods is relatively inelastic and that, regardless of tariffs, US demand for Chinese goods remains solid.