Bloomberg is reporting this week that the U.S. trade gap narrowed last year. Lower shipments from China and declining oil imports are driving the trend, the report said. However, it also noted that the “overall gap” remains wider than it was before President Trump took office, although the trend is seen as giving the president evidence he has delivered on his pledges to reduce the gap.
The annual deficit in goods and services decreased for the first time in six years, narrowing 1.7% to $616.8 billion according to Commerce Department data reported on Wednesday. However, the December gap rose from the prior month to $48.9 billion, wider than the median estimate of economists as oil imports from Canada jumped.
President Donald Trump frequently cites the trade deficit as evidence of the failure of earlier trade policies — even though most economists don’t dwell on the indicator since it reflects numerous broader economic trends beyond overseas purchases and sales. However, Bloomberg notes that the gap remains more than 20% wider than before the president took office. That reflects steady gains in American consumer spending, which drives imports, Bloomberg said.
The annual merchandise-trade deficit with China — the principal target of the administration’s trade war — narrowed 17.6% to $345.6 billion after hitting a record in 2018. Imports from the country slumped 16.2%, exceeding the drop in 2009 during the global financial crisis, while shipments to China declined 11.3%, the biggest drop since at least 2003.
That pushed China down to third place among America’s top trading partners for goods in 2019, as Mexico claimed the top spot, slightly ahead of Canada. The merchandise deficits with Mexico and the European Union hit records, while the U.S. surplus in services declined by 4% to $249.2 billion as imports gained.
Bloomberg also said it expected that the phase-one trade deal with China is likely to have an impact on the composition of trade flows, “but not the overall net position.” The boost to exports growth, however, appears likely to be delayed by the coronavirus outbreak. Overall, Bloomberg estimates exports will add only slightly to GDP in 2020 and for net trade to continue to subtract from full-year growth.
Even with the trade tensions in recent months, oil was a chief force behind the full-year deficit narrowing. Petroleum imports dropped $31.4 billion to $193.9 billion while exports increased, narrowing the full-year gap in such products to a record-low $13.7 billion. On a monthly basis, the U.S. has been a net exporter since September. However, the non-petroleum goods deficit was $839.2 billion, a record high.
In addition, the U.S. and China last month signed the first phase of a trade agreement that is expected to boost Chinese purchases by $200 billion over the next 24 months, the culmination of almost three years of acrimonious talks that have roiled markets. However, the coronavirus “threatens to affect that target that many observers thought was lofty before the outbreak.” Officials in Beijing are said to be hoping Washington will agree to some flexibility on pledges in their deal.
At the end of January, President Trump signed a new trade pact with Canada and Mexico into law extending the life and updating the trading bloc created by NAFTA in the 1990s. The White House is now turning its attention to scrutinizing trade links with other nations and regions including the UK, Africa and the European Union, with whom relations started to sour in 2018 when the administration invoked national-security considerations to impose tariffs on steel and aluminum from Europe.
President Trump argued on Tuesday in his State of the Union address that the administration’s tariff strategy with China has worked and will protect U.S. workers and intellectual property, open markets and “bring billions and billions of dollars into our Treasury.”
Bloomberg also noted that while the remaining Chinese tariffs mean significant payment flows to the U.S. Treasury, they raise costs for importing firms who must decide whether to take this “hit” to profits, shift supply chains or pass along price increases to customers.
As a share of the economy, the overall trade gap narrowed to 2.9% of gross domestic product from 3% in 2018 — still significantly smaller than in the decade before the last recession, when it approached 6%.
For the full year, U.S. exports fell 0.1% to $2.5 trillion as shipments of civilian aircraft declined amid the grounding of Boeing Co.’s 737 Max plane, while sales of autos, consumer goods and petroleum gained. Imports fell 0.4% to $3.12 trillion on lower purchases of crude oil, computer accessories and telecommunications equipment.
So, we will see. There continues to be significant global trade tensions that likely will continue to dampen global growth, although the phase one deal with China is being welcomed as providing significant relief in the months ahead. At the same time, there are growing uncertainties regarding the impacts of Brexit and the continuing possibility of U.S. tariffs on European autos — as well as continued fights over European tax policies on U.S. firms — debates that should be watched closely as they proceed, Washington Insider believes.
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