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Economic Forecasts

U.S. Trade Gap Growing, Exports under Pressure

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

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The U.S. deficit on global trade is set to widen further, despite efforts to curb the shortfall with principal competitor China. Officials from both countries are trying to reach a comprehensive trade deal by March 1 that would ratchet down tensions and ward off Trump administration threats to more than double current 10% tariffs on many Chinese imports. Beijing has offered to buy more U.S. products, including crops such as soybeans, to reduce the deficit but Washington insists that any agreement must also address longstanding U.S. grievances including lack of protection for U.S. copyrights and outright theft of U.S. intellectual property by Chinese firms. To pressure China, the Trump administration has levied tariffs on $250 billion of Chinese imports already and holds out the possibility of penalizing an additional $267 billion that would cover virtually everything that China sends to U.S. markets if a deal isn’t struck.

That’s only part of the trade equation. The U.S. has also levied tariffs on steel and aluminum imports from most countries, including Canada and Mexico, even after the three North American neighbors renegotiated a free-trade pact. In retaliation, a host of countries ranging from China to the European Union to Mexico and Canada have imposed penalties on imports from the United States, protesting particularly against American steel and aluminum tariffs.

See Also: 10 Companies Already Hurt by President Trump's Tariffs

China is far and away the main target of U.S. trade ire. The shortfall on trade with China is the biggest with any country. In addition, China engages in a variety of practices that irk Washington, including forcing U.S.-based companies to share technological know-how as a condition of doing business in China. The United States also wants much stronger protection of intellectual property, is calling on China to scale back support for state-owned enterprises and demanding it open its markets more widely. Although they don’t like paying more for imported materials, such as steel, there is considerable support in the American business community and among lawmakers for the Trump administration’s efforts. But they also worry that matters will only escalate, harming flows of global trade.

During November, the shortfall between exports and imports fell by 11.5% to $49.3 billion. But that followed five straight monthly increases and owed largely to one-off factors, specifically a sharp decline in imports of cellphones and petroleum products. During the first 11 months of 2018, the overall deficit swelled by 10% to $552.3 billion. What was apparent in November was that tariffs are having an effect, driving up how much U.S. consumers pay. Imports from China fell off by $2.9 billion. Overall, both imports and exports were down from October levels, raising the prospect that trade was becoming a drag on economic growth.

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During 2019, a further 7%-8% widening in the deficit is likely as a growing U.S. economy pulls in imports. A U.S.-China trade deal would be a boon for U.S. export, not just to China, but generally because it would relieve some of the uncertainty about potential damage to global trade flows. Unfortunately, global growth is cooling and that will limit demand from abroad while a buoyant U.S. dollar is making U.S.-produced goods more expensive in foreign markets. That means that any actual shrinking in the U.S. trade deficit is likely some years away.

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Sources: Department of Commerce, Trade Data