Level-setting on merchandise imports

Stephen Stanley | April 11, 2025

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

With the Trump administration’s reciprocal tariffs taking effect, US trade flows seem likely to shift dramatically.  Nevertheless, it may be helpful to walk through some of the basic statistics on bilateral trade in goods to consider which countries have the largest stake in the tariff negotiations that are set to begin.

Merchandise imports

In 2024, the U.S. imported about $3.3 trillion in goods, an increase of 6% from 2023.  Treating the European Union as a bloc since that is how the administration’s reciprocal tariffs were deployed, the EU starts the list of Top 10 importers to the US (Exhibit 1).

Exhibit 1: US merchandise imports in 2024

Source: Census Bureau.

Not surprisingly, given the USMCA, flows are heavy from Mexico and Canada.  A significant portion of imports and exports to and from Canada and Mexico reflect an integrated North American production platform, most notably for the motor vehicle industry.  It is said that some auto parts may cross the US border as many as five or six times before a final vehicle is sold in the US.  At the moment, USMCA-compliant goods are not subject to tariffs when crossing the border into the US.  However, the administration is working on a formula for imposing 25% tariffs on the portion of value of imported autos for which parts were sourced outside of the USMCA bloc.

The EU exports a large amount to the US collectively, though if we                                                                                                                            separated imports by individual countries within the European bloc, only Germany and Ireland would have made the Top 10.  Otherwise, the above list is dominated by Asian countries.

Goods imports to the US from Asia fall into two broad categories, though it is not simple to divide them precisely. First, there are high-value-added goods, such as motor vehicles, electronics, and semiconductors. This type of product constitutes the bulk of imports from Japan, South Korea, and, to a large extent, Taiwan.  The other grouping is low-cost consumer goods and industrial supplies, taking advantage of the cheap, plentiful labor available in the region. This category represents much of what the US imports from China.  Several Asian countries that have large trade flows with the US, most notably Vietnam, are running an export model similar to China’s or include outsourced production by Chinese firms seeking to lower costs or evade tariffs.  In particular, imports from Vietnam to the US began to pick up dramatically after President Trump imposed tariffs on China in his previous term in 2018 and 2019, as Chinese suppliers moved a portion of their operations offshore to avoid US tariffs.

Bilateral merchandise trade balances

In 2024, the U.S. merchandise trade deficit totaled $1.2 trillion, up from $1.06 trillion in 2023.  Measured as trade deficits—again, treating the EU as a bloc—China heads the list of Top 10 with the largest bilateral deficits.

Exhibit 2: Bilateral merchandise trade deficits in 2024

Source: Census Bureau.

This list correlates closely with the reciprocal tariffs announced by President Trump on April 2. The countries with the largest deficits are the ones facing the steepest tariff increases. The formula used by the administration reportedly hinged mostly on the magnitude of bilateral trade deficits relative to the size of each country’s economy.

This list also correlates closely with the rhetoric of President Trump and many of his aides.  The administration has trained its most intense criticism on China, but Trump has also repeatedly highlighted his objections to protectionism in Europe and has focused considerable attention on Canada and Mexico.  He has also argued that Japan, South Korea, India and others import heavily into the US but have created tariff and non-tariff barriers to prevent US companies from gaining fair access to their markets.

Narrowing and reorienting the trade war

President Trump’s announcement on Wednesday that the reciprocal tariffs above the 10% baseline were being paused for 90 days accomplished several things.  First, it was a concession to the intense negative financial market and prospective economic fallout from the April 2 tariff. In literal terms, the pivot could be spun as a minor one. The administration was likely to be negotiating deals with dozens of countries over the next few months either way.  I would imagine that the hardliners in the administration would have preferred to keep the reciprocal tariffs in place during that process to exert maximum leverage on US trading partners. Still, in theory, if most of the trading partners have already been sufficiently convinced of how serious the administration is about reorienting the global trading rules, then the practical impact of the pause in terms of shifting the negotiation dynamics may be small.

Nonetheless, I would argue that the pause does clearly offer new information to financial market participants and US businesses and consumers.  First, it underscores that President Trump is sensitive to the negative financial market and economic impact of his directives. As I have maintained throughout this process, Trump’s overarching priority is likely to be achieving a strong U.S. economy.  He has indicated that he is willing to endure some degree of economic pain to achieve his ultimate desired result, but this week’s event reassured that there is a limit beyond which he is not willing to go.

The pause also suggests that those arguing that tariffs should be used as a negotiating tool rather than being imposed and left in place to protect US industry and raise revenue may be gaining traction in the intense internal debates going on within the administration. The fact that Treasury Secretary Bessent, who is clearly in the former group, was sent to speak for the president at the White House press conference on Wednesday is an encouraging sign for those, like me, who have predicted that the bulk of the tariffs would eventually be negotiated down.

While outsiders cannot know for sure, President Trump’s willingness to pause the tariffs may also be interpreted as a sign that administration officials are optimistic that the offers that they are fielding are credible. Bessent and others have suggested that as many as 75 countries have asked for negotiations and that several countries have already sent representatives and begun to engage seriously. Presumably, Trump’s willingness to pause, which reduces his leverage in the negotiating process, suggests that he believes he can get to an acceptable outcome without actually imposing the full reciprocal tariffs. However, it is also possible that Trump came to believe that he had little choice because financial markets were unraveling and the economy was headed quickly toward recession, in which case his pivot says little about the state of preliminary negotiations.

Finally, by pausing tariffs on everyone else and ratcheting them up for China, President Trump has more clearly highlighted that his ultimate goal is to isolate China. As of Thursday, administration officials indicated that China tariff hikes add up to 125%, which puts total tariffs (including those on China before Trump took office) at 145%.  That level of tariff is punitive and is likely to lead to near immediate shifts in trade flows.  US retailers are already asking for massive price concessions from their Chinese suppliers, and I suspect that a mad scramble is on to find alternative sourcing where possible.

Secretary Bessent noted on Wednesday morning, even before the pause announcement, that his hope was to line up deals with as many allies as possible and then to enlist them to gang up to collectively force China to reorient its economy away from exports. The steps taken later in the day on Wednesday clearly point to that strategy.

China has chosen to match the U.S. tariffs and is charging 125% tariffs on U.S. goods. At this point, both sides have noted that further tariff hikes are unnecessary, as current levels will likely make most trade uneconomical.  It is not at all clear how this standoff will play out. China’s leadership does not face mid-term elections in November 2026 or a term limit in 2028, and China’s Communist government has historically taken a very long view. China may simply try to wait President Trump out.

If this trade war is simply a face-off between the US and China, it could prove to be a stalemate. This is likely why the U.S. is seeking to enlist allies to create a robust bloc of countries that would pressure China to curb its massive trade surplus and alter its trading practices.

In any case, after the immediate reaction of relief of financial markets on Wednesday, reality began to set in that even the tariffs in place—10% on everyone else and 145% on China—are likely to be sufficient to slow the US and global economies.  Moreover, the uncertainty for now remains crushing, and business investment is likely to remain soft until firms have a better sense of how this saga will end.

In my view, the next key milestone for the financial markets and the economy will be the timing and substance of the first announced bilateral trade deal. Fear and uncertainty will likely dominate until there is more clarity. The first deal will not only offer hope of a happy (or at least less sad) ending, but it will also provide a blueprint for what the administration is asking for and what it is willing to accept from key trading partners.  Once the administration seals a trade deal or two, financial markets might be able to relax a bit and businesses may be able to begin to resume planning for the future.