Trade Diversion, Tariffs, and Trade Deficits

The following chart from a recent Geo-Graphics blog post highlights beautifully what many have been saying for a long time: The main impact of tariffs is generally trade diversion – imports are diverted from one country to another, but tariffs alone can do little to reduce overall trade deficits.

As the Geo-Graphics blog states:

China … has retaliated [to U.S. tariffs] by pressuring its firms to find alternative [sources of supply], from agricultural goods to oil, helping to increase the U.S. deficit with China to just over two percent of GDP—as the blue line on the above  figure shows. Meanwhile, America’s global trade deficit has expanded by eight percent.

Given that the US trade deficit with China was already increasing sharply before the imposition of tariffs began, and given that existing contracts and problems of finding new sources of supply commonly cause a lag between the imposition of tariffs and changes in trade patterns, we should not read too much into these preliminary results.

Nevertheless, the MAC, unlike tariffs, will make U.S. goods cheaper in addition to making Chinese goods more expensive. Consequently, the MAC will encourage the Chinese to purchase U.S. goods (making the Chinese more dependent on us), while also discouraging U.S. purchases of Chinese goods (making us less dependent on them). The MAC's result is precisely the kind of de-coupling and reduced Sino-dependency for the U.S. that many have been advocating.

Furthermore, because the MAC will keep pushing imports down and exports up until balanced trade is achieved, it will assure the virtual elimination of the US trade deficit, thus making it possible once again for Americans to earn as much producing exports as they spend on imports.

America Needs a Competitive Dollar - Now!