Rising trade deficit no cause for worry

Trump dealt blow as US trade deficit jumps

The goods trade deficit with China increased 11.6 percent to an all-time high of US$419.2 billion in 2018.

What's new. The overall US trade gap in goods and services widened to $621 billion in 2018, a 12.5% increase over 2017, according to newly released USA government data.

The total trade deficit in goods and services increased by 18.8% in December to reach -$59.8bn, the Department of Commerce said, as export growth failed to keep up with that for imports.

Beijing has offered to buy more American farm goods and energy - a pitch that Xi made to Trump when they met during a December dinner at a global conference in Buenos Aires with the idea of narrowing the US trade gap with China.

Over the past year, even as he imposed tariffs on foreign-made solar panels, washing machines, steel, aluminum and assorted goods from China, imports roared ahead of exports. As a part of this strategy, he has entered into a trade war with other countries, notably China, levying tariffs on their exports to the United States of America with the intention of pricing them out of the U.S. market to the benefit of domestic producers.

Economists don't like to dwell too much on the U.S. trade balance. And he may settle for a deal that falls short of Beijing agreeing to make concrete and enforceable changes to curb theft of US intellectual property, including cybertheft.

In brief, what's going on with the US trade deficit is mainly a result of macroeconomics, not trade policy.

It has been evident for months that the President was failing to shrink a trade gap that he calls "unsustainable" and that he says represents a massive transfer of wealth from Americans to foreigners.

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"It's more substituting, a reshuffling of trade", Irwin said.

The growth in the U.S. and the higher interest rates that have accompanied it also mean the United States dollar has strengthened against its major trading partners, making imports cheaper and exports dearer.

In 2009, amid the Great Recession, the trade deficit fell 40 per cent from the peak three years earlier to about US$506 billion. That, too, leads to higher trade deficits. and it's one of many reasons Team Trump might want to cool it with the schadenfreude about other countries' economic woes. Part of the gap is caused by countries that use unfair trade policies to dump goods in the U.S, but it has a lot to do with the strong consumer culture and low savings rates since the 1970s, which create robust demand for foreign goods. A new economic downturn would mean the trade deficit is reduced, but that's hardly an ideal situation.

The most important cause of large and growing USA trade deficits is persistent currency undervaluation by countries such as China, Japan, and Korea, which have run large, persistent trade surpluses, as well as large structural surpluses accumulated by the European Union, including especially Germany and the Netherlands. That typically means Americans buy more from other nations. So some of the increased USA exports to China will mean a diversion of sales that had been going to other countries.

News broke this week that Trump intends to essentially revoke preferential treatment on certain Turkish and Indian goods received when imported into the US market, drawing criticism from both countries and potentially opening American exporters up to additional hurdles when trying to reach consumers in those countries. The annual shortage of goods and services increased by 12.5 percent. The tariffs are a major factor in the ongoing trade war between Washington and Beijing.

Looking at December alone, exports fell by 1.9% to $205.1 billion and imports rose by 2.1% to $264.9 billion. The trade war with China has been a dark cloud that has damped investment.

The total USA goods deficit surged 10.4 percent to $891.3 billion, the highest level ever recorded. Rather, Trump's main "culpability" in trade is that his cuts in taxes and regulations have the USA economy outperforming most of the rest of the world.

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