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Macro Market Update- Trade Deficit

Authors: Jerusan Jegatheeswaran Co-VP Education/ Research, Dragos Cada Co-VP Education/ Research, Alice Li Research Analyst, Amy Li Research Analyst, Helen Feng Research Analyst

U.S. Trade Deficit Hits 10-year High

Data released on Wednesday by the US Department of Commerce showed that the US trade deficit, the difference between US imports and exports, soared to $621 billion in 2018, the highest in a decade. The annual deficit in goods and services increased by $68.8 billion, or 12.5 percent. The December gap jumped from the prior month to $59.8 billion, also a 10-year high and wider than the median estimate of economists.

For the full year, exports rose 6.3 percent to $2.5 trillion as shipments of goods including crude oil, petroleum products and aircraft engines increased. Imports jumped 7.5 percent to $3.12 trillion on purchases of items from pharmaceuticals to computers, along with services such as travel.

Last year, Trump introduced tariffs on steel and aluminum from around the globe and on a range of imports from China. The idea was that the tariffs would make imports more expensive, thereby discouraging Americans from buying foreign goods and services and shrinking the trade deficit, which is the key of Trump’s protectionist trade policies. Unfortunately, the opposite has happened. Wednesday data showed the merchandise-trade deficit with China -- the principal target of Trump’s trade war -- increased 11.6 percent to an all-time high of $419.2 billion in 2018. The deficit between the US and the European Union also increased in 2018, up by $17.9 billion to $169.3 billion.

Note: The last time trade deficit was that high was because of the deteriorating trade with China, a worsen balance in the trade of high-tech products and an ever-increasing dependence on foreign petroleum imports.

Strong U.S. Economy vs. Economic Weakness around the World

A strong U.S. economy, particularly when compared to economic weakness around the world, was a significant factor contributing to the rising imbalances. Imports were boosted by strong demand from US consumers. The U.S. economy expanded at a pace of 2.9 percent last year, a strong rate despite Trump’s expected 3 percent growth rate. The tax cut of $1.5 trillion and stimulus of additional government spending counted for most of the growth, which were enough to overcome the tariffs imposed by the Trump administration. When the U.S. economy is doing well, U.S. consumers tend to spend more on big-ticket items such as appliances and automobiles. At the same time, U.S businesses will tend to increase their investment in new plants and equipment. From both sides, there will be more U.S. purchases of both domestic and foreign products.

The softer demand from abroad, on the other hand, was more acutely affected by retaliatory tariffs on US goods. U.S. trading partners did not do well last year. Italy officially entered into a recession at the end of last year, and most of the major economies in Europe were on the edge of recession. China also saw a significant slowdown. Its economy grew 6.6% in 2018, the lowest pace in 28 years. Trump’s attacks and threats to impose tariffs on trading partners from China to the EU also contributed to the slowdown in those economies, reducing their demand for American goods.

Strong USD

Strong currency could also contribute to the widening trade deficit. US dollar index rose 4.6% in 2018, which stood out in the market wreckage of 2018. A strong US dollar made foreign goods cheaper in the U.S. and American exports more expensive abroad. One possible reason for the appreciation of US dollar is again the relatively weak growth around the world. Investors aboard viewed U.S. economy, with the deepest market and profitable corporations, as the safer place to invest. To make their investments, they bought US dollars which raised its value.