It is pretty easy these days to open any news source and read about the US’s growing economy and the parallel decline of world economy. We can also hear about increasing trade deficits, forthcoming bi-lateral trade deals, and more. So what is going on with the Trade War and the US Economy?
According to reporter Jason Margolis from Pri.com, back in “1980s and '90s, China was selling a bit more than the US was selling to them. The US trade deficit with China was a few billion dollars.” Fast forward to 2018, the US Census Bureau disclosed that the US – China trade deficit was at an all-time high of $419B! This is an increase of nearly $44B over 2017, despite efforts to curtail imports and expand exports.
One reason for this could be that the threat of increased prices drove a steady surge of import purchasing by American buyers as they sought to obtain goods prior to the forecasted tariff increases that were projected across all of 2018. Another reason could be that the strong US Economy (as compared to a declining world economy) is driving the trade imbalance. Historically low unemployment and a strengthening dollar are driving greater consumption despite tariffs that are in place to facilitate the purchase of US made goods.
So will this last? The expectation appears to be no! As I learned in economics back when getting my MBA, economic cycles play out in slower timeframes than news cycles. While the Fed may announce a n interest rate hike on day-1, it might take 6 months for the impact of the rate hike to be felt on the economy. Interestingly, when things are done to augment these natural economic cycles (say for example trade wars or quantitative easing), the normal timelines can adjust.