While U.S. tariffs have led to a significant decline in imports from China and Canada, international trade continues to function through redirection and adaptation, according to the latest economic commentary from the Institute of Financial Policy (IFP) under the Slovak Ministry of Finance. U.S. imports from China dropped nearly 42% year-on-year in May, amounting to a nominal decline of $14.5 billion. This figure represents roughly 0.4% of annual U.S. imports and 0.1% of China’s GDP. Imports remained subdued in June, down more than 16% compared to the same period last year. Despite this, China’s overall exports continued to grow by an average of just over 5% in May and June, suggesting that Chinese exporters are finding alternative markets or routing products through third countries to circumvent tariffs. However, export volumes to the EU have recently stagnated, prompting China to shift more attention to other Asian markets. At the same time, the weakening of the U.S. dollar has yet to yield a positive effect on the country’s trade balance. A lower dollar typically helps domestic production by making imports more expensive and exports more competitive. Since the beginning of the year, both the euro and the Japanese yen have strengthened against the dollar by more than 8%. This shift has not curbed the growth of European and Mexican exports to the U.S., which continue at a stable pace. Despite a temporary improvement in April, the U.S. trade deficit remained high in May. Analysts suggest that the ongoing dollar depreciation, coupled with growing uncertainty, could lead to a slowdown in imports from Europe. The sharp weakening of the dollar in recent months may reflect a loss of investor confidence in U.S. fiscal policy. This is evidenced by the recent divergence between interest rates and exchange rates, as well as a disconnect between the performance of stock markets and bond yields. Traditionally, countries offering higher bond returns attract more capital, thereby strengthening their currencies. U.S. bonds still offer higher interest rates than their European counterparts, yet the dollar continues to lose ground. This contradicts the usual pattern seen during global market volatility, where the dollar acts as a safe haven. The IFP concludes that recent developments, including persistent budget deficits and fiscal strategies viewed as unsustainable, are undermining investor trust and contributing to the dollar’s weakness, even in the context of rising U.S. interest rates. Source: TERAZ