This was a no-brainer, but I’ll take credit for it anyway. A year ago when Trump announced his tariffs, in March 2018 I predicted that there would be no trade war and no meaningful uptick in inflation, and was right right on both counts.
The US trade gap with the rest of the world jumped to a 10-year high of $621bn (£472.5bn) last year, dealing a blow to President Donald Trump’s deficit reduction plan.
The trade deficit is the difference between how much goods and services the US imports from other countries and how much it exports.
Reducing the gap is a key plank of Mr Trump’s policies.
But in 2018, the US exported fewer goods compared with how much it bought.
A quick guide to the US-China trade war
Trade wars, Trump tariffs and protectionism explained
Mr Trump claims that the US is being “ripped off” by other nations and wants countries to lower their tariffs on US goods and buy more of them.
However, official data shows that while exports of US goods and services rose by $148.9bn last year, imports jumped by $217.7bn.
It means that the gap is the widest since 2008, when the global financial crisis hit and the US fell into recession.
Three reasons for this:
China would rather trade than engage in retaliatory action. It’s in their best economic interests to do so.
The U.S. economy is still humming along, with no signs of recession on the horizon, and positive economic growth and sentiment is correlated with bigger trade deficits. In q4 of 2008, at the depths of the crisis, the balance of trade suddenly shrunk a lot due to decreased imports:
The US dollar is persistently strong , which creates an incentive for China to increase exports. Also, as discussed earlier, with regard to countries and economies with reserve currency status, policy that is supposed to be inflationary can actually be deflationary if the expectation is such policy will lower growth, so the result is a flight to safety in the form of a strong dollar and lower bond yields, both of which are considered deflationary.