U.S. Trade Deficit With China narrows as tariffs reroute

U.S. trade deficit with China fell from tariffs, demand shifts, diversion

According to Bloomberg, the U.S. annual goods trade deficit with China shrank in 2025 to the smallest in more than two decades even as the gaps with Mexico and Vietnam widened to record levels. The pattern points to a mix of higher tariffs on Chinese imports, softer U.S. goods demand, and supply‑chain reconfiguration rather than a single-cause explanation. The Council on Foreign Relations adds that despite the narrowing, China still accounts for the largest U.S. bilateral goods deficit and that the broader relationship spans services and investment beyond merchandise trade.

Methodologically, the bilateral balance referenced here covers goods trade only and is measured in nominal terms; it does not include services, where the U.S. typically runs a surplus. Based on data practices set by the U.S. Census Bureau, interpreting month-to-month moves requires caution because seasonal factors, sector swings, and timing effects can be material.

Tariffs on Chinese imports and consumer costs: what changed

Tariffs on Chinese imports were designed to compress direct inflows from China and reduce reliance on specific supply chains. The U.S. Treasury has also flagged mounting economic frictions around broad tariffs, ranging from higher costs and supply‑chain disruptions to legal challenges, underscoring that the configuration of duties matters for both import prices and business planning.

Economists caution that headline improvements can overstate structural change because sector noise and timing effects can be large. As context, Mark Zandi, chief economist at Moody’s Analytics, warned that much of the deficit’s apparent narrowing may be temporary, noting that “the deficit is as large as it’s ever been” beneath the noise.

In practice, tariff incidence can raise landed costs for importers even if final consumer prices adjust with a lag. Stockpiling ahead of tariff resets, shifts in order timing, and changes around de minimis small‑parcel channels have also affected the flow of recorded imports, making it difficult to attribute the entire drop in the U.S. trade deficit with China to tariffs alone.

Trade diversion to Mexico and Vietnam keeps Chinese inputs upstream

Record widening of U.S. trade deficits with Mexico and Vietnam alongside a lower bilateral gap with China is consistent with trade diversion and “China +1” sourcing. Analyses archived on arXiv indicate many final goods assembled in third countries still embed Chinese upstream intermediates or tooling, so measured country-of-origin can change even when core inputs do not.

That dynamic helps explain why direct imports from China can fall while the overall U.S. deficit remains broadly unchanged: the value-add simply migrates across borders in reporting terms. As reported by Forbes, shifting production to Vietnam or Mexico can reduce the headline U.S. trade deficit with China without materially reversing overall trade imbalances if underlying inputs remain tied to Chinese suppliers.

Sustainability will hinge on the future tariff path, the resilience of U.S. goods demand, and how quickly supply chains re‑engineer genuine upstream diversification beyond assembly. For now, the evidence suggests tariffs, demand shifts, and diversion are all in play, lowering direct imports from China while keeping Chinese content present earlier in the supply chain.