Trump’s Trade War With China Didn’t Actually Reduce Trade

Written by SK Ashby

Trump's global trade war has not fundamentally altered our economy or our trading relationship with most of the world, but its proponents might point toward reports from the Commerce Department and say the trade war reduced trade with China at the very least.

But did it?

According to the Federal Reserve economists, no -- it didn't. On the surface, Trump's tariffs on Chinese goods did change the value of imports and exports, but that is only because businesses on both sides of the ocean were intentionally misreporting their value to evade tariffs.

The misreporting by both American and Chinese companies explain most of the contraction in the U.S.-China trade deficit since the two sides started imposing tariffs on each other in 2018, the Fed economists Hunter Clark and Anna Wong argue. The trade balance was $88 billion smaller in 2020 than it was in 2017, according to their calculation, with $55 billion of that shortfall due to evasion of U.S. tariffs, $12 billion due to misreporting to get higher Chinese VAT rebates, and the remaining $20 billion was unexplained.

“The trade conflict had a much smaller impact on the U.S. bilateral trade balance with China than first meets the eye when looking at U.S. data,” they wrote. The under-reporting of U.S. imports also mean about $10 billion in tariff revenue may have been lost, they estimated.

In other words, imports and exports between China and the United States barely budged at all even if numbers reported by the Commerce Department told us otherwise. And the department was not necessarily lying about it because the numbers were based on deception from importers and exporters in both countries.

I've quipped that American businesses and consumers have paid billions in stealth taxes on imports and all we have to show for it are some red hats, but that was apparently a very true joke. Trump's trade war with China has been even more fruitless than any of us gave it credit for.