Trump promised to shrink the trade deficit. Instead it exploded

Mar 08, 2019, 00:47
Trump promised to shrink the trade deficit. Instead it exploded

The United States had the largest trade deficit of its 243-year history last year, despite President Donald Trump's promise to address the growing gap through "America first" policies that have levied new tariffs against allies and foes.

The U.S. trade deficit jumped almost 19 per cent in December, pushing the trade imbalance for all of 2018 to widen to a decade-long high of $621-billion.

After eliminating the influence of prices, which renders the numbers used to calculate gross domestic product, the goods-trade deficit widened to $US1.01 trillion in 2018 from $US935.3 billion in 2017.

But most economists say that such increased Chinese purchases would likely only divert United States shipments from other foreign customers, shrinking the trade gap with China but leaving the global balance largely unchanged.

But Trump's trade policy also contributed materially to the growth of the gap in 2018.

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The U.S. economy is now producing around US$21 trillion of GDP a year so the deficit in goods trade is a little over four per cent a year.

In other words, the 10 percent was not a tariff created to reduce the trade deficit.

Trump announced in a Twitter post last month that he would delay another planned increase in tariffs on $200 billion worth of Chinese goods that was originally set for 1 March.

Trump also halted talks on the Transatlantic Trade and Investment Partnership (TTIP), which had been negotiated between the European Union and the USA since 2013 during the Obama administration. USA stock futures were marginally lower.

There are also some broader macro-economic influences at play, not the least of which is a weak savings rate in the U.S. as well as the role the USA dollar plays as the world's reserve currency. Americans want to buy things affordably, and with a hot economy, there is money to buy them.

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'Perhaps Donald Trump will now discover that tweets and bluster alone won't dramatically shrink the trade deficit, ' said Scott Paul, president of the Alliance for American Manufacturing in Washington.

But the blowback from the Trump tariffs - and China's retaliatory import taxes on US goods - has been steady, at home and overseas.

The deficit, which is the difference between the goods and services the USA buys from other countries and those it sells to them, rose to a seasonally adjusted $59.8 billion in December - an increase of nearly 19 percent.

For the full year, exports rose 6.3 per cent to $US2.5 trillion as shipments of goods including crude oil, petroleum products and aircraft engines increased. Whether you actually should remove services trade in such calculations is questionable. Economists disagree about whether or not such a deficit is good or bad, since more importing could be an indicator of a healthy economy and consumers with more disposable income. Their research also revealed that workers in many Republican-leaning counties suffered the most economically from Trump's trade disputes.

The President has successfully negotiated new agreements with South Korea, North American neighbours Canada and Mexico, and appears close to a deal with China. And instead of pulling back on support for technology development, Premier Li Keqiang, in his report to the national legislature on 2019 government goals, promised even more such support.

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A study by economists at the New York Federal Reserve, Columbia University and Princeton University found that the trade war is costing consumers and companies $3 billion per month in added tax costs.