The US Trade Deficit with China is Understated by as Much as 30 Percent
January 18, 2025
Normal trade math does not add up. US imports and China exports are not in sync.
China’s Bermuda Triangle
UBS comments on China’s Bermuda Triangle
When looking at Sino-US trade, the value of China’s exports to the US should be less than the value of US imports from China. This is true for any bilateral trade relationship. Export numbers record the value of the goods exported when sitting on a ship about to leave a country. Import numbers record the value of goods when they arrive in a country. In between the two is the cost of transporting and insuring those goods, so the import values will automatically be higher than the export values. Critically, import values do not include any trade taxes—those are paid by domestic consumers after the goods have arrived.
If we look at China’s exports to Europe, or US exports to China, this is exactly what we find. The value of exports and imports move in sync, with the value of imports somewhat higher than the value of exports.
This used to be true for China’s exports to the United States. But in recent years, China’s customs data has shown China to be exporting more than the US is importing. The shift is not small—China claims to export almost 19% more than the US claims to be importing. Even that large gap understates the problem—China’s export values should be about 15% lower than US import values, given transport costs. Therefore, this change in the data either overstates China’s exports or understates US imports by over 30%.
Unless 30% of ships are disappearing in some kind of midPacific equivalent of the Bermuda triangle, this suggests mismeasurement of the data. This anomaly is something that only happens with China’s exports to the US (not with US exports to China, or China’s trade with other countries). It also does not apply evenly across all sectors— furniture, machinery and equipment, electrical equipment, and plastics are areas where significant anomalies take place.
Tariffs do not directly affect the values measured by the data, because US consumers pay trade taxes on the value of imported goods (i.e., after the import data cited here has been calculated). However, rerouting supply chains in response to this might have led to this anomaly. Goods from China that are routed via Vietnam or Mexico (for example) may be classed as exports to the US by China, but as imports from Vietnam or Mexico by the US.
Apparent Supply Rerouting
When considering the impact of the Trump trade taxes, it is the US data that should be used. Tariffs will be paid by US consumers and calculated off US import data, so what matters is not what China thinks it is exporting to the US but what the US thinks it is importing from China. If the US believes the goods come from somewhere else, they will not be impacted by China-specific tariffs.
The above paragraph strikes me as wrong. But it depends on whether you want to measure tariffs collected or Trump’s effort to collect them.
I asked Brad Setser, senior fellow for international economics at the Council on Foreign Relations, and Director of International Economics, for the United States Department of the Treasury to comment.
Brad Setser Comments
- Chinese exports started exceeding US imports only in those categories with tariffs, and only after the tariffs were imposed — which provides the basic answer.
- We know the US isn’t counting 1 billion small value (de minimis) packages in the trade data, and that alone is at least $60b in missing US imports that appear in the Chinese trade data. There are other sorts of tariff avoidance/ circumvention as well.
- So right now the Chinese export data is better guide to US China trade than the US import data — which is why I now emphasize the $500b or so China reports in exports to US rather than the $400b or so the US reports in imports
This appears to be an amusing case of China cleverly avoiding US tariffs but not clever enough to hide it better.
US Trade Deficit
US balance of trade, chart by Mish.
The above chart shows the US trade deficit with China improved but at the expense of increased deficit elsewhere.
It’s now unclear if the deficit with China really improved at all. In practice the deficit might really be $100 billion larger than I show.
Whereas Setser says use China export data, UBS says use US data. It depends on what your angle is.
Do you want an accurate estimate of imports from China, or do you want tariff collection numbers that match incorrect US import measurements?
Who Pays Tariffs?
Trump says China pays the tariff. That’s ridiculous.
To the extent tariffs are collected at all (not avoided by rerouting through Vietnam or Mexico etc.), US consumers or importers pay the tariffs.
Tariffs are a tax.
The combined impact of rerouting trade, strengthening of the dollar, and the genuine buying of goods from countries other than China negated much of the damage of the tariffs.
Tariff Policy
The Congressional Research Service comments on
U.S. Tariff Policy.
Who Makes U.S. Tariff Policy?
The Constitution grants Congress the power to lay and collect duties and to regulate commerce with foreign nations. Because tariffs are no longer a major element of domestic tax policy, they have instead become an instrument of U.S. foreign policy and trade promotion. As such, Congress often works with the President to set tariff policy by authorizing the President to negotiate trade agreements and to adjust tariffs in certain circumstances.
What Has U.S. Tariff Policy Been?
Over the past 70 years, tariffs have never accounted for much more than 2% of total federal revenue. In FY2024, for example, CBP collected $77 billion in tariffs, accounting for approximately 1.57% of total federal revenue. Instead, the United States has generally used its tariff policy to encourage global trade liberalization and pursue broader foreign policy goals. Since 1934, the United States has reduced or eliminated many tariffs as part of bilateral and multilateral trade agreements. By supporting the creation of the GATT and the WTO, the United States Congress sought to reduce tariff rates globally within a rules-based trading system. Roughly 70% of all products enter the United States duty free.
Issues for Congress
For more than 80 years, Congress has delegated extensive tariff-setting authority to the President, who was more insulated from domestic protectionist pressures than individual Members of Congress. This delegation led to an overall decline in global tariff rates. However, it has meant that the U.S. pursuit of a low-tariff, rules-based global trading system has been the product of executive discretion. While Congress has set negotiating goals, it has relied on Presidential leadership to achieve those goals. The Trump Administration was openly critical of low-tariff policies and made extensive use of authorities delegated to the President to increase tariffs on certain goods. As a result, duties paid on U.S. imports doubled from FY2015 to FY2020 from approximately $37 billion to $74 billion. The Biden Administration has maintained many of those policies with CBP collecting $77 billion in FY2024. Some Members have supported the increased use of tariffs; however, others have expressed concern about the economic impact of increasing tariffs. Some Members and committees have also expressed concerns about the President raising tariffs without congressional approval.
Related Posts
September 26, 2024:
Trump Claims Tariffs Will Reduce the Trade Deficit. Let’s Fact Check.
Trump proposes 60 percent tariffs on China. Would that reduce the trade deficit? Where? How?
If Trump imposed 60 percent tariffs on China, I believe all trade with China would cease.
The US would not collect a cent on those tariffs. That’s the good side actually because would be US consumers who paid the tax.
November 22, 2024:
Trump’s Proposed Tariffs Are a Tax on Consumers, Primarily the Poor
For the poorest fifth of Americans, who will have incomes of less than $29,000 in 2026, the tariffs will impose a tax increase equal to 5.7 percent of their income that year.
November 25, 2024:
Trump Threatens 25 Percent Tariffs on Mexico and Canada on Day One
Trump says he will unilaterally scrap his own allegedly “Best in History” USMCA trade deal and impose huge tariff hikes on our top two trading partners. Is this constitutional?
Either this is a Bluff, or Trump is a fool. It could be both. But Trump would have to break his own “Best Deal in History” to do what he says.
The deal renews in June of 2026. I believe Trump will wait until then to do anything drastic, if even then.
There would be serious ramifications to break a trade deal that Trump himself negotiated. No one could possibly believe any deal he negotiated.
How Much Revenue Can Trump Realistically Bring in From Tariffs?
Given that Trump, AKA Tariff Man, is going to hike tariffs, the key question is
How Much Revenue Can Trump Realistically Bring in From Tariffs?
There are many moving parts to this question including Congress, retaliations, and consumer impacts.
The Tax foundation provides an estimate. Mine is lower because Trump is not going to unilaterally break USMCA.
