By Jeff Ferry, CPA Chief Economist
The US trade deficit in goods and services edged up in March to $50.0 billion, slightly worse than February’s $49.3 billion. But the big news in today’s report from the Department of Commerce was that the US goods deficit with China has fallen significantly, to just $20.7 billion. This indicates that tariffs on Chinese imports are having a substantial impact on China trade.
The China deficit of $20.7 billion is our smallest deficit since March 2014. Moreover, the improvement has come largely through a reduction in imports. In March, our exports to China were $10.4 billion, $1.9 billion lower than the year-ago March. However, our imports were $31.2 billion in March, $7 billion less than the March year-ago figure, and our lowest monthly China imports level in three years. The sharp reduction in our China imports shows that the tariffs are working. This is clearly visible by looking at last year’s data. Our March 2019 exports to China were equivalent to the monthly rate of exports in 2018, $10 billion a month. But on the import side, the picture is very different. Our 2018 imports from China averaged $44.9 billion a month. So far this year, our imports are averaging just $35 billion a month, and falling each month.
“The administration’s China strategy is working,” said Jeff Ferry, CPA Chief Economist. “Our imports from China fell substantially in March from the already-reduced levels of February. The reason is not just the immediate cost of the tariffs, but their broader effects in driving hundreds of companies—American, multinational, and even Chinese—to diversify production away from China. That diversification will continue even when the tariffs are gone. It’s also important to note that the consumer is not paying for these tariffs, because consumer prices continue to rise at an anemic 2 percent annual rate. Whether or not there is a deal with China, these tariffs are starting to reshape global supply chains. If the tariffs are increased tomorrow, as seems likely, they will continue to benefit the US economy, while at the same time reducing US dependence on China for so many manufactured goods.”
The news from other bilateral trading relationships was less encouraging. Our goods deficit with Mexico in March was $9.5 billion, the worst monthly figure ever, and 18 percent worse than the year-ago level. The Mexico deficit is typically dominated by automotive trade, an industry where our monthly worldwide deficit widened to $18 billion. Our deficit with Japan worsened to $6.6 billion, 3.4 percent worse than the year-ago March level. Our Germany deficit was also worse, at $5.6 billion in March, 8.9 percent worse than a year ago.
The data suggests these nations may be benefiting from an ABC effect—"Anyone but China.” Our total goods imports in March were $214.1 billion, just 1.7 percent higher than the March 2018 level. The large jump in our deficits with nations in North America, Europe, and Asia suggests US importers are shifting away from China and looking worldwide for new sources of goods. Vietnam is the country mentioned most often by manufacturers who say they are moving production out of China, and this is already visible in the trade data. In March, the US imported $5.3 billion worth of goods from Vietnam, a whopping 34.8 percent above the year-ago level.
Looking at specific products, soybean exports surged in March to $1.9 billion, up 39 percent on the February level. Exports of civilian aircraft fell steeply, by 12 percent on the previous month, suggesting Boeing’s difficulties with its 737 Max model are taking a toll on the aircraft sector, traditionally one of America’s leading export sectors. On the import side, pharmaceutical imports were up sharply, at $12.4 billion, an increase of 13.8 percent on the previous month.