The tit for tat tariff war continues with China putting additional tariffs in place. Add the dollar getting stronger to the mix and the trade deficit could likely grow.
US businesses and consumers are paying more for Chinese imports through the tariffs since it is well known that tariffs will be absorbed by either businesses or consumers depending on the businesses ability to pass on the additional costs. But, if imports from China are cheaper (even with tariffs) because of the exchange rate, consumers and businesses will continue to buy Chinese goods. In essence the exchange rate will seek to offset the tariffs to some degree. For China, this will have the additional benefit of keeping production up in their export sector.
Countries who have controlled their currency values relative to other currencies have historically caused long-term problems with their economies. The recent devaluing of Chinese currency makes imports to China more expensive. Add Chinese tariffs and exports to China will drop even more and add to the trade deficit.
The bottom line is that tariff wars are not easy to win. War is war and no one plays fair. International trade is a complex subject. We only have to revisit the worst of the tariff wars, Hawley Smoot, to assess the potential results. Everyone loses.
