| Key Points: – Higher tariffs and China+1 sourcing redirected imports away from China. – Bilateral deficit shrank, but overall US trade gap barely changed. – Savings-investment dynamics, not tariffs alone, drive total balance, Obstfeld argues. |
The US trade deficit with China has fallen to its lowest level in more than 20 years. The shift reflects reconfigured supply chains, higher tariffs, and firm-level sourcing choices. As reported by The Washington Post (https://www.washingtonpost.com/business/2026/02/19/tariffs-trade-deficit-2025/), trade has shifted away from China to other Asian exporters even as the overall US deficit changed little.
Higher tariffs raised the cost of importing from China, while many buyers re-routed orders to Mexico and Southeast Asia under a China+1 supply chain strategy. The bilateral gap narrowed, but substitution diluted the effect at the whole-economy level.
In December 2025, the White House said the overall trade deficit had plummeted to a five‑year low and that the China deficit was the smallest since 2009, framing this as evidence tariffs “work” (https://www.whitehouse.gov/articles/2025/12/trump-tariffs-work-trade-deficit-plummets-to-five-year-low/). Those claims focus on nominal values and a bilateral lens.
Maurice Obstfeld, Senior Fellow at the Peterson Institute for International Economics, argues US saving and investment behavior is a more fundamental driver of overall trade balances than external trade policies alone (https://www.chinadaily.com.cn/a/202504/02/WS67eca107a3104d9fd381d355.html). That perspective helps explain why a smaller China gap can coexist with a still‑large total deficit.
The International Monetary Fund has urged China to reduce its large global trade surplus by rebalancing toward domestic consumption and services. That global‑level pressure sits alongside bilateral US–China tensions.
What the latest data shows: goods vs services
The bilateral balance comprises a large goods deficit and a persistent US surplus in services. Goods cover merchandise like electronics, machinery, autos, and apparel; services include travel, business services, and royalties.
As reported by the Associated Press (https://apnews.com/article/trump-trade-deficit-tariffs-china-9eb6bd10ff635d63e46ee99d34ce1d05), the overall US trade deficit slipped modestly in 2025 while tariffs rose sharply. That pattern is consistent with a partial reallocation of sourcing rather than a broad collapse in imports.
Officials have argued that higher, broader tariffs reduce exposure to Chinese suppliers by pushing sourcing elsewhere. “playing with a losing hand,” said Scott Bessent, US Treasury Secretary, characterizing Beijing’s escalation as counterproductive (https://www.cnbc.com/2025/04/08/treasury-secretary-bessent-says-chinas-escalation-was-big-mistake-country-playing-with-losing-hand.html).
China rejects that framing, saying the US deficit is driven by structural factors and American consumer demand, and noting US firms operating in China contribute to export statistics, according to Xinhua (https://english.news.cn/20250310/942baa14ee4a425b9cc4a34c8aad823d/c.html). Those points highlight measurement nuances and value‑added embedded in global supply chains.
Beyond tariffs, companies widely adopted a China+1 supply chain strategy. Orders have been diverted to Mexico and Southeast Asia, with some risk that transshipment can mask Chinese content. Research hosted on arXiv finds upstream links to Chinese manufacturing often persist even when final assembly moves abroad (https://arxiv.org/abs/2508.06828).
At the time of writing, shares of PDD Holdings traded near $100.86, up 0.58% intraday, with sentiment described as bearish, based on Yahoo Finance data. Market moves are context only and not a policy signal.
FAQ: US–China deficit, tariffs and trade diversion
Tariffs or diversion: which mattered more?
Both mattered. Tariffs raised direct import costs; trade diversion to Mexico and Southeast Asia re‑routed orders. Effects overlap, and transshipment can blur measurement.
Bilateral gap vs overall US trade deficit
The bilateral gap with China narrowed sharply. The overall US trade deficit changed little, indicating substitution toward other suppliers rather than a broad rebalancing.
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