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Economic Forecasts

Widening Gap Fuels Trade War Intensity

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

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GDP 2.9% pace in '18, up from 2.3% in '17 More »
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Trade deficit Widening 5%-6% in '18 More »

The trade war between the United States and China is heating up as each imposes tit-for-tat tariffs on the other. The Trump administration is zeroing in on Beijing after first imposing near-global tariffs on imported solar panels, washing machines, steel and aluminum. Washington then slapped tariffs on $34 billion worth of Chinese goods, with levies set to kick in on another $16 billion worth of to-be-named goods. President Trump is also threatening to hit another $200 billion of products.

China retaliated with tariffs on $34 billion worth of U.S. imports. Today [August 3] it said it has a list of another $60 billion worth of goods to tax after Trump’s latest threat. Nervous exporters and markets hope one side blinks. Perhaps Beijing would agree to buy more American goods to shrink its bulging $375-billion trade surplus with the United States. A healthy and growing U.S. economy is fending off damage so far. But further escalation between the world’s No. 1 and No. 2 economies could harm other regions, potentially slowing trade volumes and darkening an otherwise favorable global outlook.

The United States wants China to restructure its economy by fully opening its markets and reducing its surplus with the USA. Washington’s deficit with Beijing is by far its largest with any country. The Trump administration charges that Beijing uses unfair methods to gain an advantage in its dealings with U.S. firms, such as forced transfers of U.S. technology, subsidization of state-owned enterprises, and outright patent and copyright theft.

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Trump is also pressuring U.S. allies, including neighbors Canada and Mexico, for trade concessions. Renegotiation of the 24-year-old North American Free Trade Agreement (NAFTA) has stalled. Mexico taxed American farm and industrial exports after Trump’s steel and aluminum tariffs. Canada penalized goods ranging from steel to yogurt to whiskey in retaliation. Trump is also sparring with the European Union, though threatened tariffs on cars from the continent are on hold after the two sides agreed to talks. There is no guarantee that the auto threat won’t resurface if negotiations don’t go Trump’s way.

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With so much volatility, a minimum 5%-6% widening in 2018’s trade deficit (leading it to exceed $600 billion) seems inevitable, especially because European growth appears to be losing step and Washington’s pressure on China could strain Beijing. In contrast, the U.S. economy is growing, which causes it to import more.

A decline in June exports pushed up the deficit up 7.3% to $46.3 billion. Foreign sales of capital goods including aircraft and automobiles weakened from May, as did exports of consumer goods. Crop exports, notably soybeans, climbed rapidly in the lead-up to June as farmers tried to reach Chinese markets before tariffs kicked in. Those exports are falling back to normal levels now. Imports were up in June and included foreign-made cars, consumer goods and pharmaceuticals. During the first six months of this year, the U.S. shortfall between imports and exports grew 7.2% to $291.2 billion from the first half of 2017, which is unlikely to calm trade antagonisms.

The politically sensitive deficit with China edged up 0.9% in June to $33.5 billion. It was up 8.6% from last year’s first half. Deficits with Canada and Mexico also widened in June, which is unlikely to make Trump any happier with Washington’s NAFTA partners. But the gap with the European Union narrowed significantly, 12%, to $11.7 billion.

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Sources: Department of Commerce, Trade Data