Please enable JavaScript to view the comments powered by Disqus.

Economic Forecasts

Rising U.S. Deficit Fans Trade War Flames

Kiplinger's latest forecast on the direction of the trade deficit.

iStockphoto

GDP 3.0% pace in '18, up from 2.3% in '17 More »
Jobs Slower job gains likely this year as labor market tightens More »
Interest rates 10-year T-notes at 3.3% by end '18 More »
Inflation 2.6% in '18, up from 2.1% in '17 More »
Business spending Up 7% in '18, boosted by expanded tax breaks More »
Energy Crude trading from $60 to $65 per barrel in June More »
Housing Price growth: 5.0% by end of '18 More »
Retail sales Growing 4.2% in '18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in '18 More »

The U.S.’s trade shortfall is worsening, deepening trade war anxieties as the Trump administration and China prepare to implement broad-based tariffs against one another’s exports. President Trump believes that the United States is being taken advantage of by its trading partners, especially China. The White House is imposing tariffs on imports ranging from solar panels and washing machines to steel, aluminum and 1,300 Chinese industrial, technological, transportation and medical products. The U.S.’s actions have rattled the rest of the world, including key allies such as Canada and Europe, and infuriated Beijing, which has slapped matching duties on staple U.S. exports, including soybeans, pork, beef, airplanes, cars and chemicals. Amid rising tensions about how to shrink the gap between exports and imports, expect to see a 5% to 6% widening in the deficit in 2018 on top of the steep 12.6% surge to $568.4 billion racked up over the course of 2017.

In February, the deficit on goods-and-services trade climbed 1.6%, to $57.6 billion, the sixth straight monthly increase and a new nine-year high. Exports also rose, but that’s unlikely to straighten the Trump administration’s protectionist bent because imports increased at the same pace. Worse yet, while the U.S.’s hard goods trade deficit kept climbing, its traditional surplus on services trade shrank to its smallest in more than five years. There is hope that negotiations aimed at easing restrictive Chinese measures, such as requiring American firms to partner with Chinese companies as a condition for doing business there and thus enable acquisition of their technological know-how and manufacturing skills, can reduce the heat generated by tit-for-tat imposition of tariffs by Washington and Beijing. Longer term, Washington’s likely goal is to get pro-market allies to also pressure China into rebalancing trade so that it is more in the U.S.’s favor.

See Also: Good Reasons to Invest in Foreign Stocks Right Now

U.S. exports will remain buoyant if a full-blown trade war is avoided. Foreign sales of American-made industrial supplies and materials gained $2 billion in February; capital goods exports increased $658 million; auto exports, $925 million. The dollar’s value is down 9% from its 2016 high, a plus for exports since it makes them cheaper for foreigners to buy. On the imports side, the news also is mostly positive because flush consumers solidly demand more food, industrial supplies and capital goods. That strong demand, which increases global trade flows, will continue and build a bigger U.S. trade deficit for the full year.

The sensitive U.S.-China deficit shrank some in February. The gap contracted nearly 19%, down to $29.3 billion. But it’s still by far the widest with any single country. On the touchy Mexican trade front, the monthly deficit jumped 46%, to $6.06 billion. Washington, Ottawa and Mexico City are still trying to renegotiate the 24-year-old North American Free Trade Agreement, which Trump periodically threatens to scuttle entirely because he thinks the terms are unfair to U.S. companies. Despite the tough talk, confidence is relatively high that a new deal to keep North American trade flows rising will be struck. Trump did temporarily exempt Mexico and Canada from his global steel and aluminum tariffs, conditioned on their making concessions to U.S. firms.

Advertisement

Today’s turmoil is ironic, in part because it comes amid an upswing in global trade. Every major region is engaged in simultaneous expansion, a relatively rare occurrence. It is an opportunity for American exporters seeking new business to do so while having the extra benefit of a weaker U.S. dollar, which helps them compete in foreign markets. The greenback’s value shot up relative to other major trading currencies in 2014 and 2015, hindering exports, but it shed about 8% of its value in 2017. The dollar has weakened further since Trump threatened additional tariffs, but that decline is now being driven by fears of a broader trade war, which could sap trading volumes.

via e-mail: Kiplinger Alerts — Intelligence for your business success

Sources: Department of Commerce, Trade Data