The Debate: The China Deficits and Who Pays the Tariff?
We offer some clarity on China tariffs and trade deficits to correct Trump’s debate lies as Biden and CNN moderators both went MIA.
I like this tariff plan. What could possibly go wrong?!
The trade topic was embarrassingly light this past week with Trump lying as usual and Biden not showing up for the fight.
While high-price media rock stars Jake Tapper and Dana Bash were busy adding minimum wage value-added to the event, some basic whoppers just flew by in the debate as Trump rolled with his recurring lies around collecting billions in tariffs from China. No one called him out.
Biden did not help his case by demonstrating zero perspective on tariffs despite being someone who has been an active user of tariffs on China in recent policy actions.
The tariff topic would have forced Trump to reconcile his poor grasp of the numbers, how the policy works, and the threat, but the Biden handlers did not prepare him (or maybe they were just bad at preparing him). China and Tariffs are headline drivers lately.
The trade and tariff topic once again was sacrificed on the altar of self-delusion and an embrace of basic factual ignorance in the debate this week. Things never get better on this topic despite the fact that the need for clarity on tariff economic effects has never been greater (see Trade Flows: More Clarity Needed to Handicap Major Trade Risks 6-11-24, Income Taxes for Tariffs: Dollars to Donuts 6-14-24).
China syndrome revisited…
There were a lot of references to China by Trump, but a few stand out:
Trump: “Under this guy, we have the largest deficit with China.”
No. Trump had by far the largest trade deficit with China. The China trade deficits peaked under Trump in 2018. During 2023 and April 2024 LTM, the goods trade deficit with China under Biden reached the lowest level since 2010.
The fact that Trump lied about trade and tariffs just means it was a “day ending in Y” and par for the course stacked with fabricated nonsense. See chart below.
As Trump made this statement, Biden was clearly not prepared to counter such a glaring lie. How can a President (Biden) who just reviewed, updated and increased so many tariffs on China goods not be able to generate a simple response to a major headline topic after all the Trump talk about tariffs. That was fairly shocking.
Trump: “He never took out my tariffs because we bring in so much money.”
This is either a flat out lie on his “seller pays delusion” or an oft-repeated example of Trump being “stupid” (one of his favorite words to call people including Biden). As a stable genius who spent years being told the basic tariff fact that “buyer pays” by his Goldman types such as Gary Cohn, Trump knows it is a lie unless he resets his brain daily and needs fresh input.
Biden clearly missed the chance to counter this on the assumption that he knows the difference (we have heard Biden state the facts and read about him stating the “buyer pays.”). So, what happened to Biden? That was painful.
The reality of tariffs is now more important than ever given Trump’s psychological fascination with doling out tariffs before doing an awkward and loud end zone dance. He is hooked on kicking national leaders in the ass. The reality is that most of the people who even glance at trade topics know that the buyer pays. The Tapper and Bash duo did their deaf mute hologram act on a very important economic topic and Biden was overwhelmed by the barrage of Trump lies. You would think he would have one simple soundbite on tariffs and China.
Biden could have said “Trump had by far the largest trade deficits with China in 2018. Trump lies about tariffs.” That would be a start. He could continue, “Trump told the G7 he collected tens of billions from China. He was lying and continues to lie. Those tariffs flow into prices at a lag or are absorbed by buyers. We need tariffs to protect America, but we need to be thoughtful about how we use tariffs. Farmers can get hurt in retaliation. It is not just something to do for ego and headlines.”
Trump collected zero from China in tariffs. He avoided most questions, but he was not even specifically asked “Who pays?” Lame moderators with big paychecks. Those tariffs are paid by the buyer and flow through into prices or get eaten by the buyers in the form of lower margins. Most of the studies show it had been flowing through to consumers and supply side pricing power made that easier. Trump and Biden were both part of that aspect of the inflation equation.
Trump: “He’s got the worst situation with China. China is going to own us. If you keep allowing them to do what they are doing to us as a country, they are killing us as a country, Joe, and you can’t let that happen. You’re destroying our country.”
The only one that might destroy the country right now is Trump with his tariff insanity (and ambitions to be a dictator). Imports of goods from China right now (April 2024) are down to the lowest level since 2011 during Obama’s first term. These statements by Trump are just one more set of lies to throw on the fire.
As we detail below, exports to China are higher under Biden than under Trump in each of the first three years of Biden and again LTM. Trump knows at this point that he can sell any bill of goods to an audience programmed to not fact check. Lies sell. The trench-level MAGA Meathead crowd (as opposed to the “Who will keep my taxes lower?” support) may be beyond recovery at this point for a factual priority epiphany, but swing votes and independents matter.
China trade and other dealings with US corporations have been a problem ranging from tech transfer to legal ownership of operations and the “JV rules.” Very little has been done about it other than some tit-for-tat tariff battles that required a taxpayer-funded bailout of the ag sector that was bigger than the auto bailout.
One of Biden’s problems (or for whoever comes next in 2025) is that in substance very little has changed in the bigger picture other than a much lower trade deficit as sourcing changes slowly and new importers roll in. So, when the US economy recovers (as it has impressively from 2021 to 2023), more goods get purchased and the supplier chains get charged up. A recovering US economy makes trade deficits run higher even if the trade deficits rise with countries other than China (see links). The importer address may change (e.g. Vietnam), but the deficits remain high.
As we show in the chart above, the massive base of exports and imports with China will be vulnerable to an outsized decline in total activity (imports + exports) if Trump slaps on the scale of tariffs he is talking about. Go ahead. Just expect retaliation and major supplier chain dislocations on the other side. You can’t go to war without being shot at (Trump was well aware of that in 1968) and supplier chains will get dislocated. Companies will struggle. Layoffs will come.
The tariff strategy in 2018-2019 was one reason why the Fed had to ride to the rescue in 2019 with three cuts on the basis of their findings that “fixed investment and exports remain weak.” Trump never mentions that Fed support in his “greatest economy ever” fantasies. The transition to a “tariff economy” was not a smooth one in 2018 (see Histories: Asset Return Journey from 2016 to 2023 1-21-24), and it will get much worse in 2025 under Trump proposals.
See also:
Trade Flows: More Clarity Needed to Handicap Major Trade Risks 6-11-24
Income Taxes for Tariffs: Dollars to Donuts 6-14-24.
Trade Flows: Deficits, Tariffs, and China Risk 10-11-23