Tariffs Having Little Effect on Widening U.S. Trade Deficit

The U.S. trade gap hit a seven-month high in September amid an expanding tariff dispute. According to a government report, the trade deficit widened more than expected as imports expanded and the merchandise gap with China hit a record amid an escalating trade dispute. The news raised questions as to the effectiveness of the Trump Administration’s tariffs especially on China.

On Friday, U.S. Commerce Department data showed the gap for goods and services increased 1.3 percent from the prior month to $54 billion. The median estimate of economists surveyed by Bloomberg called for a deficit of $53.6 billion. Imports and exports both increased 1.5 percent.

Overall exports rose to $212.6 billion, including gains in petroleum products, gold, oil and aircraft. Imports increased to $266.6 billion, boosted by a range of capital and commercial goods. The overall trade gap for goods increased to $76.3 billion, also a record and in line with the preliminary figure last week.

Why Aren’t the Tariffs Helping to Shrink the eficits?

So what’s the problem? Are the tariffs making the situation worse? Will they ever be effective in bringing down the trade deficit? It all depends on who you believe.

President Trump sees the skewed trade numbers as a sign of U.S. economic weakness caused by bad trade agreements and abusive practices by exporters.

Economists see different reasons for the large gap. They say the reality is that Americans buy more than they produce, and imports fill the gap. So changes in trade policy are not likely to shrink the deficit very much because a strong U.S. economy encourages Americans to buy foreign goods.

Furthermore, the strong U.S. Dollar is raising the price of U.S. products and putting American corporations at a disadvantage in foreign markets.

Essentially, the U.S. is a service country so attacking manufacturing is not going to work in the long-run. That’s pretty much old school economics and here is the proof.

According to government data, in September, the U.S. ran a $23.2 billion surplus in the trade of services such as banking and tourism, but a deficit of $77.2 billion in the trade of goods such as automobiles and cellphones.

So the best way to shrink the deficit is to encourage Americans to stop buying cellphones, foreign cars and other imported goods. However, the “Buy American” strategy is not going to work when the economy is flying high.