Cargo containers

Cargo containers are stacked on a ship at the Port of Los Angeles in Los Angeles. The U.S. Commerce Department reports Aug. 2 that America’s deficit in merchandise trade with China through the first six months of this year stands at $167 billion. 

WASHINGTON (AP) – The trade war between the United States and China has had a substantial impact on trade flows between the world’s two largest economies. But one thing has remained constant. The United States is still running its biggest trade deficit with China.

The Commerce Department reported Aug. 2 that America’s deficit in merchandise trade with China through the first six months of this year stood at $167 billion. That’s a decrease of 10.1 percent from the same period the previous year.

That is still more than the deficit the United States is running with Mexico of $50.3 billion, which is the second-largest imbalance. The deficit with Mexico increased by a sharp 34.2 percent in the first six months of the year.

With both America and China in a tit-for-tat tariff war, trade flows of both countries have suffered. America’s goods exports to China have decreased 18.9 percent in the first half of this year to $52 billion. China’s sales to the United States have decreased by 12.4 percent to $219 billion. The U.S. trade deficit shrunk slightly in June, as did the politically sensitive trade deficit with China, the principal target of President Donald Trump’s tariffs.

This past week Trump’s trade negotiators completed a 12th round of talks with China, aimed at pressuring Beijing to curb its aggressive push to challenge American technological dominance. That includes curtailing cyber theft and forcing foreign companies to return proprietary tech information. No deal was reached. More talks are planned in September.

Tensions escalated Aug. 1 when Trump tweeted that he blamed China for not following through on stopping the sale of fentanyl to the United States or purchasing large quantities of farm goods such as soybeans. He announced the United States will apply a new tariff of 10 percent on about $300 billion worth of products from China, beginning Sept. 1.

China’s government then accused Trump of violating his June agreement with President Xi Jinping to revive negotiations. Those negotiations were aimed at ending a costly fight regarding Beijing’s trade surplus and technology ambitions. China as of Aug. 2 threatened retaliation if the new tariffs are enacted.

Trump’s announcement surprised Wall Street, leading to a 600-point swing Aug. 1 on the Dow. The Dow ended the day with a decrease of almost 300 points. It lost another 250 points Aug. 2. The benchmark Standard & Poor’s 500 decreased for a fourth day, losing 0.9 percent to 2,953.56.

“It goes without saying that Trump’s latest batch of tariffs are taking their toll on markets at the end of the week, with Europe deep in negative territory and the U.S. on course for another bumpy session,” said Craig Erlam, senior market analyst at OANDA. “The announcement, which came after a week of talks in Shanghai, came as a bit of a shock to investors – not because we weren’t preparing for the possibility of more or because we were optimistic about the outcome of this week, but the knee-jerk nature of it.”

In Europe, Britain’s index of leading British shares decreased 1.7 percent at 7,453 while Germany’s DAX decreased 2.5 percent to 11,947. France’s CAC was performing even worse, decreasing 2.7 percent at 5,408.

Asian stock markets plunged Aug. 2 after Trump’s surprise threat of tariff hikes on additional Chinese imports. In early trading Tokyo’s main index tumbled 2.2 percent and Hong Kong’s benchmark lost 2 percent. Markets in Shanghai, Sydney and Seoul also declined.

“Markets are reeling after President Trump expressed his frustration with China’s stalling techniques,” said Stephen Innes of VM Markets in a report. “With the global markets on edge after Chair Powell’s communication failed so miserably, few traders have been willing to step in front of this steamroller.”

The United States previously applied tariffs of 25 percent on $250 billion worth of goods from China. China retaliated with tariffs on $110 billion in American goods, including agricultural products in a direct shot at Trump supporters in the U.S. farm belt.

The Federal Reserve cut its key interest rate July 31 for the first time in a decade, partly to counter the impact of Trump’s trade wars. A looming concern at the Federal Reserve is that Trump’s trade conflicts have escalated the uncertainty for American companies. Some companies have put off plans to expand and invest.

The new round of tariff threats has increased uncertainty in terms of global economic growth. Investors and economists think it could spur the Federal Reserve to cut rates again soon.

“While the tariff threat shouldn’t be discounted as a bluff, the Trump administration is clearly trying to kill two birds with one stone – reaching a trade deal with China and forcing the Fed to cut interest rates,” wrote Gregory Daco, chief U.S. economist at Oxford Economics USA. “As such we believe the new tariffs will be delayed or suspended later this month, but the lingering trade uncertainty and slower domestic momentum will lead the Fed to cut rates again in September.”

Trump has sought to reduce America’s persistent trade imbalance, which he said he sees as a sign of economic weakness – and the result of bad trade agreements crafted by previous U.S. negotiators. Economists say the trade gap is the product of economic factors that don’t respond much to changes in trade policy. Americans buy more than they produce; imports fill the gap. A strong U.S. dollar has also put American exporters at a price disadvantage overseas.

The Institute for Supply Management, an association of purchasing managers, said Aug. 1 its manufacturing index slipped for the fourth-consecutive month. Although manufacturing sector expanded for 35 straight months, that growth has slowed. Many blame Trump’s aggressive use of tariffs.