Why a stronger yuan, not tariffs, may be Trump’s best hope to shrink US trade deficit
- Neal Kimberley says the dollar’s strength has widened the trade deficit by making US exports more expensive and goods it imports cheaper, defeating a purpose of Trump’s tariffs
In spite of, or perhaps influenced by, US tariffs on imports from China, the US trade deficit hit a 10-year high in October. The median forecast of economists polled by Bloomberg had been for a figure of US$55 billion but the data released on December 6 showed the actual number was US$55.5 billion.
That US$55.5 billion figure represented a rise of 1.7 per cent from September’s US$54.6 billion, a figure which itself had been revised up from the original US$54 billion. The keynote US goods trade deficit with China jumped to a record US$43.1 billion in October, up 7.1 per cent from September’s US$40.2 billion.
Of course, there would be no point in Chinese exporters acting in such a way if there were no real expectation of selling those goods in the US market. It might not go down well in the White House but it may be that US demand for Chinese goods is relatively inelastic and that, regardless of tariffs, US demand for Chinese goods remains solid.
And US dollar strength in 2018 has worked against the erosion of the US trade deficit.
Part of that US dollar appreciation is accounted for by the rise in the value of the currency versus the yuan, and part of that weakness in China’s currency lies in the notion that the imposition of US trade tariffs on Chinese exports should lend itself to some degree of yuan softness.
To the extent that Chinese exports to the US have thus far not been adversely affected by tariffs, such a rationale might need to be revisited, perhaps implying room for yuan strength and some broader US dollar weakness.
Such dollar weakness might eat into the size of the US trade deficit, enhancing US exporter competitiveness by making exports cheaper in local currency terms for overseas buyers. Where US demand for imports from abroad is more elastic, dollar weakness might make such imported goods less attractive to American consumers.
But for such a scenario to unfold, it might require the market to re-evaluate its view on the consequences of US tariffs on China’s economic prospects.
It’s ironic, but for the market to deliver a weaker US dollar that might actually erode the US trade deficit, the market may have to conclude that the Trump tariffs, the central plank of the US strategy to shrink the trade deficit, aren’t working.
Neal Kimberley is a commentator on macroeconomics and financial markets