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Economic Forecasts

Trade Strains Intensify as U.S. Broadens Tariffs

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

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Tense trade relations with both allies and competitors have markets fearing an all-out trade war. The Trump administration’s efforts to persuade China to buy more U.S. goods to shrink a bulging $375-billion annual deficit have stalled. President Trump says China and others take advantage of the United States on trade, and he is threatening to slap tariffs on $150 billion of imports from China. Beijing has issued a matching threat to penalize U.S. exports if he follows through. That sets the world’s number one and number two economies at loggerheads, heightening concerns that protectionist policies pursued by the United States could escalate into tit-for-tat barriers that slow global trade flows and cloud otherwise rosy global economic outlooks.

Neighbors Canada and Mexico are also in the crosshairs. Renegotiation of the 24-year-old North American Free Trade Agreement (NAFTA) has broken down. The Trump administration has extended duties on steel and aluminum that began in March to allies including not only Canada and Mexico, but also Europe. That has enraged all of them, leading Mexico to tax a range of U.S. farm and industrial products, while Canada plans levies against American whiskey, orange juice and steel, among other items. And the European Union is drawing up its own list of products to penalize. Leaders from the U.S.’s closest allies, from Canada to France, labeled Trump’s moves insulting and illegal. Against this backdrop, expect the U.S.’s global 2018 trade shortfall to widen 5%-6%, topping $600 billion, after a steep 10% jump in 2017.

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If a storm is brewing, April may have been the lull before it. The monthly trade deficit shrank 2.1% to $46.2 billion — the lowest in seven months. But that precedes this month’s steel and aluminum tariff expansion, so it will take a few months to see how hard exports are hurt. Despite April’s contraction, the expanding trade gap trend was well established during the first four months of 2018, up 11.5% over 2017’s comparable period. Some of the increase stems from healthy demand generated by an expanding U.S. economy. American consumers and businesses typically buy lots of imported goods already. They will buy even more as U.S. manufacturers near their ability to fill orders.

There was more fodder for anger at China in the April data as the deficit with Beijing rose 8% to $28 billion. The Trump administration has not been able to get Beijing to commit to shrinking the annual deficit in nominal terms (it sought a $200-billion annual reduction). Now it’s hoping the threat of tariffs will do the job. However, such levies would cost U.S. consumers more.

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The April deficit with Mexico narrowed sharply by 30%, to $5.7 billion. And the United States posted a surplus on trade with Canada of nearly $800 million — raising questions of why American negotiators are taking such a hard line in NAFTA talks.

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Sources: Department of Commerce, Trade Data