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Changes in the U.S.-China trade deficit

Exports and imports before and after tariffs and the pandemic

Many of the trade policies that began in 2018 were driven by the high and persistent U.S. trade deficit with China. For example, the U.S. announced tariffs on solar panels and washing machines from China in January 2018, which is marked by the first vertical line in the FRED graph above. Several rounds of U.S. tariffs followed, and China enacted retaliatory tariffs.

We start our graph in January 2016 to include data before and during the period when these trade policies were initiated.*

The basic story told by the graph is that U.S. exports to China (in blue) seem to be relatively stable over time, but U.S. imports from China (in red) are more variable and also much larger. So, the bilateral trade deficit (in green), which is the excess of imports over exports, seems to follow the variable path of imports. Despite the trade war, the trade deficit peaked in October 2018. It fell after that for a few months, only to rise again above its January 2016 level by the middle of 2019.

These facts seem to suggest that the trade war didn’t achieve any significant, durable difference in the U.S.-China trade deficit. How the deficit will evolve in the future, of course, will depend on a whole host of factors, including consumption behavior and the evolution of comparative advantage in each nation.

The second vertical line on the graph marks the first COVID-19 case reported in Wuhan in December 2019. In the months that followed, there was a sharp decline in imports from China to the U.S. and also in the bilateral trade deficit.

Interestingly, since March 2020, there has been a sharp turnaround in imports and the U.S.-China trade deficit. Among other factors, this turnaround in imports may be related to imports of essential medical equipment, described in an Economic Synopses essay by Leibovici and Santacreu.

With the easing of lockdowns in the U.S. and growth in China, there also seems to be a recent spurt in U.S. exports to China, which rose to its highest level in October 2020. Indeed, because of this increase in exports, the U.S.-China trade deficit in October of 2020 is a bit lower than its level in July 2020.

Overall, COVID-19’s effect on U.S.-China trade seems somewhat surprising, with a strong rebound of trade in the relatively early months of the COVID-19 crisis in the U.S., followed by a further strengthening of trade in more recent months when the U.S. economy has seemed to be on a path to recovery.

*By the way, the numbers shown here are nominal (i.e., not adjusted for inflation). It’s a good idea to pay attention to this distinction when interpreting data, but we found that “real” numbers based on the U.S. CPI deflator here don’t lead to any qualitative differences.

How this graph was created: Search for and select “U.S. Exports of Goods by F.A.S. Basis to Mainland China.” From the “Edit Graph” menu, use the “Add Line” tab to search for “U.S. Imports of Goods by Customs Basis from China.” For the dotted line, use “Add Line” again to search for and select “U.S. Imports of Goods by Customs Basis from China.” Then in the “Customize data” section, search for “U.S. Exports of Goods by F.A.S. Basis to Mainland China.” Next, create a custom formula to combine the series by typing “a-b” and clicking on “Apply.” To add the vertical lines, refer to these instructions. Finally, use the “Format” tab to adjust the format of the graph.

Suggested by Subhayu Bandyopadhyay and Praew Grittayaphong.

View on FRED, series used in this post: EXPCH, IMPCH

Trade between the U.S. and China: Steady as she goes?

For years now, we’ve been talking about the tempest of tariffs and trade wars between the U.S. and China. The FRED graph above doesn’t reveal all the effects, but it gives us the big picture by tracking overall imports, exports, and the trade balance for goods. Clearly, U.S.-China trade has grown tremendously over the decades, along with a large trade surplus for China. But things haven’t changed in any substantial way for the past 10 years. The composition of traded goods today may be different from what it used to be, but there’s nothing remarkable happening in the aggregate.

A few more ideas:

  1. The units for imports and exports are in natural logarithms, which we’ve used before to evenly display changes over time.
  2. FRED has data only for traded goods, not services; but we did investigate this topic a while back.
  3. There’s nothing intrinsically bad about the U.S. having a trade deficit.

How this graph was created: Search for and select the “goods imports China” series and click “Add to Graph.” From the “Edit Graph” panel, use the “Add Line” option to search for and add the “good exports China” series. Set the units for both lines to “Natural Log.” For the third line, use “Add Line” again to search for and select the “good imports China” series. Then use the “Customize data” search field to search for and select the “good exports China” series. Apply formula b-a. Finally, use the “Format” tab to choose “Right” for the y-axis position of the last line.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: EXPCH, IMPCH

The usual suspects (behind U.S. trade deficits): China, Canada, Mexico, Japan, and Germany

A long-term lineup of U.S. trading partners

According to economic theory, countries should export goods in which they have a comparative advantage in production and import those in which they don’t. For several years, the U.S. has been the number 1 importer and the number 2 exporter in the world. But the U.S. has recently imposed tariffs on imports from several foreign nations, citing the growing U.S. trade deficit as a main reason. So let’s use FRED to examine the overall picture of the U.S. trade deficit and the trade balance with its largest trading partners.

The first graph shows net U.S. exports, defined as the difference between total exports and total imports, divided by GDP. This net exports-to-GDP ratio has been negative since the late 1970s, when the U.S. started running a continual trade deficit. One explanation involves important sources of income the U.S. receives from abroad, as explained in a past FRED Blog post. This flow of foreign income allows the U.S. economy to consume more than it produces.

Exploring this and other theories in detail is beyond the scope of this post, but this persistent trade deficit over the past 40 or so years does lead to interesting questions involving the U.S.’s trading partners. For instance, is the trade deficit driven mostly by trade with one particular country?

The second graph plots the difference between exports and imports as a share of GDP with respect to the U.S.’s five largest trading partners: China, Canada, Mexico, Japan, and Germany. We can see right away that there’s a significant difference between the U.S. trade deficit with China and the U.S. trade deficits with the other countries. It’s also interesting to note that, in the 1990s, the largest share of the trade deficit originated from trade with Japan. But since China’s entry to the WTO in late 2001, the largest share is China’s. We also see that the U.S. had roughly balanced trade with Mexico in the early 1990s; but around 1994, coinciding with the implementation of NAFTA, the trade pattern changed and a noticeable deficit with Mexico emerged.

Now, is having persistently large trade deficits a bad thing? The answer to this question is not straightforward. There are several forces affecting the direction of trade with different countries, and a substantial amount of research in economics is dedicated to answering this question.

How these graphs were created: For the first graph, search for and select “Net Exports of Goods and Services, Billions of Dollars.” From the “Edit Graph” panel, add a second series to the graph: “Gross Domestic Product, Billions of Dollars.” In the formula box, type a*100/b. For the second graph, search for and select “U.S. Exports of Goods by F.A.S. Basis to China, Mainland (EXPCH).” From the “Edit Graph” panel, add a second series to the graph: “U.S. Imports of Goods by Customs Basis from Germany.” Then add the “Gross Domestic Product, Billions of Dollars” series again. In the formula box, type (a-b)*100/(c*1000). Then use the “Add Line” feature to repeat the above steps for the other countries (Canada, Mexico, Japan, and Germany).

Suggested by Asha Bharadwaj and Maximiliano Dvorkin.


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