The U.S.-China trade war started in January 2018 with Trump’s announcement of tariffs on solar panels and appliances that applied broadly, but were mostly aimed at China. It escalated quickly from there with China announcing retaliatory tariffs and Trump doubling down with more tariffs on Chinese steel and electronics.
China escalated again and the two parties were almost at the point of 25% tariffs on 100% of all goods traded between them before a “truce” was declared in early December to allow time for negotiations. The truce expires March 1.
Many observers assumed the trade war would lead immediately to a drastic reduction of U.S.-China trade and a reduction in the U.S. trade deficit with China. Neither of those events happened. As this article describes, China’s trade surplus with the U.S. actually reached a new record in 2018 of $323 billion, a 17% increase in the surplus compared with 2017.
Many analysts interpreted the data to mean that Trump’s trade war is a failure and China will “win” the war. That’s not correct. The China trade surplus represents U.S. importers trying to buy as much as they could from China before the tariffs were put in place. It takes about six months from the time tariffs are announced to when they apply.
Since tariffs were announced between January and June, U.S. importers have been busy loading up on inventory in the second and third quarters of 2018 to “beat” the tariff hikes. That explains the surplus.
What happens next will be more interesting. With U.S. businesses loaded up on Chinese inventory, U.S. growth slowing and tariffs finally taking hold, China’s exports to the U.S. could fall off a cliff in early 2019.
Don’t believe the trade war happy talk going on right now. This trade war is about to get much worse.
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