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Economic Forecasts

U.S. Trade Gap Widens as China Tensions Simmer

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

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The U.S. deficit on trade with the rest of the world is worsening, despite efforts to dial back tensions with China. The Trump administration’s challenge of Chinese trade practices that Washington deems unfair helped ignite a trade war between the world’s two largest economies that both sides now are trying to temper. President Trump and Chinese President Xi Jinping agreed not to levy new tariffs for 90 days while they try to reach a comprehensive agreement. But skepticism is running high. Meantime, monthly deficits with China keep breaking records. The White House imposed tariffs against $250 billion of Chinese imports, and was threatening to bump up the penalty on $200 billion worth of those next January before the truce was brokered. It’s also holding out the possibility of levying tariffs against an additional $267 billion of Chinese imports, covering virtually everything China sends the United States, if a deal can’t be struck by March. Tariffs also are still in place against steel and aluminum imports from most countries, including Canada and Mexico — even after the three North American nations renegotiated a free-trade pact. China and allies, including Canada, Mexico and the European Union, imposed retaliatory tariffs against U.S. exports, partly from anger at American metals tariffs.

China is far and away the main target of U.S. trade ire. It runs the biggest surplus with the United States of any country. It 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 wants much stronger protection of intellectual property and is calling on China to scale back support for state-owned enterprises that compete with private business, as well as open its markets more widely. There is considerable support in the American business community and among lawmakers for the Trump administration’s efforts, although they don’t like paying more for imported materials, such as steel, as a result. But they also worry that matters will only escalate, harming flows of global trade.

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The shortfall between exports and imports grew for the fifth straight month in October, to $55.5 billion. Several factors were at play: A strengthening U.S. dollar made imports cheaper while growth in China and Europe is losing a step. Tariffs also were a problem, evident in a decline in exports of soybeans after Beijing slapped a retaliatory tariff against them, driving up their cost in China’s markets. Earlier this year, soybean exports contributed significantly to overseas sales, and the administration hopes that China will once again buy a lot of U.S. agricultural products as a show of good faith during negotiations. In October, U.S. imports nudged up by 0.2%, while exports were down 0.1% from September as foreign sales of some industrial goods, such as aircraft and engines, declined. At nearly $600 billion, 2018’s deficit will be about 7%-8% higher than 2017’s; 2019 will likely see an equal rise. Nonetheless, U.S. factories are going at a healthy pace and jobs are plentiful, which is helping draw in larger volumes of imports, ranging from new cars to consumer goods. Trade tensions are a risk to the U.S. economy, but there is no indication that they could tip it into a downturn.

The deficit with China hit a record $43.1 billion in October, a 7% increase from September, underscoring the administration’s criticism. China could agree to buy more U.S. agricultural products, including soybeans, but much of the imbalance reflects fundamental differences, like China’s low-labor-cost advantage in manufacturing and the U.S. economy’s concentration on services (an area in which it runs a surplus with the rest of the world). Balancing trade between Beijing and Washington is extremely complex, and negotiating it will certainly take longer than 90 days. Actually shrinking the deficit is far in the future.

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Sources: Department of Commerce, Trade Data