TRUMP’S TARIFFS ON CHINA MAY EVEN INCREASE US-CN TRADE DEFIICT

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 TRUMP’S TARIFFS ON CHINA MAY EVEN INCREASE US-CN TRADE DEFICIT

The US has always had a big trade deficit with China. The 10-year chart below shows the wide gap between US Exports to China (Blue line)  and US Imports from China (Orange line).

The reasons

1. The strong seasonal/cyclical character of US Imports from China which were obtained  by decomposing data into trend, seasonal/cyclical and residual components  (Orange line in chart below) indicates that these are intermediate goods that are the input for US manufacturing and demand and correlates with their inventory cycles. The US cannot do without such inputs for their manufacturing because Chinese goods are much cheap and of high quality. Chart below shows the strong seasonal/cyclical nature of US imports from China (Orange line). US Imports from China show a seasonality strength of 0.37 versus 0.26 for Exports to China. 

2. Frankly, Chinese consumers and manufacturers  don’t want US goods when the local goods are much cheaper and of higher quality than American goods- EVs, machine tools, construction machinery, robots, drones, cellphones, smart watches, even clothes and sports sneakers. And yes: Guitars of course: Eastman, Shijie, Joyo pedals and amps.

The Tariffs will cause both Imports from China and Exports to China to drop, but the Exports to China will drop more than the Imports from China.  Using SARIMA (Seasonal Auto-Regressive Integrated Moving Average) the forecast for 12-months ahead (See chart below) shows an increase in the trade deficit. The forecast has an accuracy metric (MAPE: Mean Absolute Percentage Error) of 9.3 % for Exports and 8.5% for Imports which is an indication that US Imports from China are stickier than its Exports to China. 














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