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Economic Forecasts

Widening U.S. Trade Gap Defies Constraints

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

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GDP 2.9% pace in ’18, up from 2.2% in ’17 More »
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Interest rates 10-year T-notes at 3.2% by end ’18 More »
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Housing Price growth: 5.0% by end of ’18 More »
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Trade deficit Widening 5%-6% in ’18 More »

Robust U.S. growth keeps widening the U.S. deficit, despite Trump administration efforts to rein it in through “America first” policies that penalize imports. Washington has ignited a bitter trade war with China, the single largest contributor to America’s trade imbalances, but also engaged in tit-for-tat import duty battles with the European Union, Canada and Mexico. To date, tariffs are levied on $250 billion of Chinese imports, and President Trump threatens to add penalties on another $267 billion, covering virtually everything China sends to the United States. Although a deal has been struck with Canada and Mexico to renew the 24-year-old North American Free Trade Agreement, the Trump administration refuses to lift duties on steel and aluminum imports that it imposed on those partners last spring.

Despite Trump’s focus on trade balances with individual countries as a measure of the economy’s health, his administration’s policies are more likely to grow the deficit than to cut it. Domestic demand for imports is high. At the same time, the U.S. dollar is appreciating as nervous investors seek safety amid rising U.S. interest rates and deteriorating conditions in many emerging markets, such as Turkey and Argentina. The stronger dollar makes U.S. goods and services more expensive in foreign markets and drags on exports.

The deficit on trade with the rest of the world is set to increase by 5%-6% this year. Growth is slowing modestly in Europe while China is deliberately importing less from the United States, partly in retaliation for Trump’s tariffs. Trade tensions between the world’s two largest economies is intensifying. The Trump administration wants to compel Beijing to open its markets more fully and to compete more fairly. It wants China to step up copyright protections, stop forcing U.S. companies to turn over technological known-how as a condition of doing business in the country, and cease subsidizing state-owned businesses. That effort has stirred more rancor than cooperation from Beijing.

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The monthly shortfall between U.S. exports and imports hit a six-month high of $53.2 billion in August. Exports dropped for a third month in a row, down 0.8% to $209.4 billion. Meanwhile, imports grew by 0.6% to $262.67 billion, the fourth consecutive monthly bump as an expanding economy drew in more foreign automobiles, industrial supplies and petroleum. Low U.S. unemployment and reduced tax rates are fueling the American appetite for imported goods, while softer conditions overseas are crimping demand for U.S.-made products. Tariffs are also directly affecting foreign sales. This is evident in August’s $1-billion drop in soybean exports to China after Beijing slapped tariffs on American beans in July, driving prices up and causing Chinese buyers to seek supplies elsewhere.

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The deficit with China climbed 4.7% in August to a record $38.57 billion. That will keep trade hostilities bubbling. But the monthly deficit with Mexico also jumped, by 56.9% to a record $8.7 billion. However, August saw a 10% reduction in the deficit with the European Union, which dropped to $15.71 billion, while the gap with Canada narrowed to $2.74 billion from $3.19 billion in July

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Sources: Department of Commerce, Trade Data