WASHINGTON—The U.S. posted its widest monthly trade gap since 2008 in December and a record annual deficit in goods as sturdy economic growth underpinned higher spending by American consumers and businesses.
.. Over the course of 2018, Mr. Trump imposed tariffs on a range of goods that the U.S. imports from other countries, particularly China, in hopes of giving American producers a competitive edge. He publicly lambasted companies that outsourced jobs, renegotiated pacts with major U.S. trade partners like Mexico, Canada and South Korea, and rankled longtime European allies by deeming their steel and aluminum exports a threat to national security.
Still, the trade gap swelled 12% from 2017 to $621 billion. Excluding services that the U.S. sells to foreigners, such as tourism, intellectual property and banking, the deficit grew 10% to $891.3 billion, the largest level on record.
Economists say the shortfall was fueled, ironically, by another Trump administration policy: tax cuts and spending increases that juiced demand from U.S. consumers and businesses at a time when growth in the rest of the world was slowing. Concern that the U.S. economy could overheat prompted the Federal Reserve to raise interest rates four times in 2018, contributing to a strong dollar in the second half of the year that made foreign goods relatively cheap for Americans
As a result, U.S. imports grew 7.5%, while exports increased just 6.3%.
“Higher take-home incomes for households have definitely proven to be very conducive to imports,” said Pooja Sriram, an economist at Barclays. “The outcome has been in almost the opposite direction of what the administration has wanted.”
U.S. imports of consumer goods last year jumped 7.7% to $647.9 billion, fueled in part by a 22% rise in inbound shipments of drugs. Industrial supplies like fuel and crude oil were another driver of the trade gap, with imports rising 13% from 2017 to $575.7 billion.
Highlighting the limitations of Mr. Trump’s trade policies, the goods deficit widened most with China, the U.S.’s largest commercial partner and the main focus of White House efforts. That is partly because Chinese authorities responded to tariffs by drastically scaling back their country’s purchases of key U.S. exports like soybeans, cars and metals, production of which is concentrated in states that Mr. Trump won in the 2016 election.
U.S. goods exports to China fell 7.4% in 2018 to $120.3 billion, while imports from China grew 6.7% to $539.5 billion as Americans increased their purchases of electronics, furniture, toys and other products... But deficits do subtract from gross domestic product, and the widening of the trade shortfall at the end of 2018 was a factor in slower U.S. growth in the fourth quarter... “Trade now looks set to be a more serious drag in the first quarter,” Mr. Hunter said in a note to clients. He estimates annualized GDP growth will slow to just 1.5% in the first three months of 2019, down from 2.6% in the fourth quarter.
.. Odds that the new plan will go far enough in addressing U.S. complaints are long. President Xi and others in the Chinese leadership are used to exercising a strong hand in the economy. Many bureaucracies and state-owned enterprises benefit from the unfettered access to resources that come with big government initiatives and so don’t want to be hampered by the greater competition of a level playing field... Officials in the Trump administration have called Made in China 2025 a threat to fair competition, saying it encourages state subsidies for domestic companies and forces technology transfer from foreign partners. Some U.S. officials are likely to see the changes as more cosmetic than real.. A key concession under consideration would be dropping the numerical targets for market share by Chinese companies, these people said. Made in China 2025 sets defined goals of raising domestic content of core components and materials to 40% by 2020 and 70% by 2025, an increase that comes at the expense of foreign competitors.
.. The Trump administration has pushed the “competitive neutrality” principle, making sure that it was part of the renegotiated North American Free Trade Agreement, known as the U.S.-Mexico-Canada Agreement. Under the concept, governments are prohibited from favoring state-owned companies over privately owned ones.
.. The idea was a favorite of prior U.S. administrations as well and became part of the Trans-Pacific Partnership
.. Vice Premier Liu, has told his U.S. counterparts, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, that China is planning to reduce auto tariffs and boost purchases of soybeans and other crops.
.. But the U.S. wants structural issues like Made in China 2025 and other policies addressed in any full trade deal.
Trump has always sold himself as a winner. Trump can’t trust anyone, including perhaps, his family. Trump fears the investigations.
US President Donald Trump’s goals in renegotiating the North American Free Trade Agreement were to reduce the current-account deficit and restore US manufacturing jobs. But the new United States-Mexico-Canada Agreement fails on both counts and will reduce US employment and weaken American producers’ position in international markets... Meanwhile, US tariffs on imported steel and aluminum from Mexico and Canada remain in place... Among other things, the USMCA will limit the number of vehicles that can be imported into the US, which effectively opens the door to managed trade. It is not yet clear how import quotas will be allocated; but almost any quota-allocation system will stifle competition and innovation by favoring incumbents over new market entrants... Trump’s stated goals in renegotiating NAFTA – if “renegotiation” is the right word for when a bully attacks his smaller neighbors until they accede to his demands – were to reduce the bilateral US trade deficits with Canada and Mexico and “bring good jobs back home.” By those criteria, the new agreement is a spectacular failure. As any economist knows, a deficit in goods and services is a macroeconomic phenomenon reflecting a country’s domestic expenditures and savings. For the US to shrink its overall deficit, it must either reduce expenditures or increase savings. Nothing in the USMCA does that... Moreover, the deal will probably destroy more US jobs than it creates. The new rules-of-origin (ROO) benchmark requiring that 75% of an imported vehicle be produced in North America (up from 62.5% under NAFTA) is likely to reduce employment by raising the costs of production... In fact, automakers in Asia and Europe are probably ecstatic at the prospect of increased sales. They have gained an edge over North American producers in third countries, and perhaps even in the US market itself... As for foreign-owned automakers operating in the US, they will almost certainly offshore any facilities that are producing inputs destined for foreign markets. This diversion, combined with the higher price of cars in the US, will further reduce overall US auto production, and thus auto-sector employment... even if US parts producers were to expand production, they would be inclined to automate as much of it as possible, rather than hire more workers.
.. One of NAFTA’s major benefits was that it allowed for integrated supply chains across North America. US automakers gained access to labor-intensive parts at lower cost from Mexico, and Mexican producers gained access to less expensive capital-intensive parts from the US. As a result, the North American auto industry improved its competitive position internationally. The USMCA will not destroy NAFTA’s efficient supply chains, but it will raise their costs, thus undercutting that advantage.
.. in the long run, it will likely
- reduce US employment,
- shrink North America’s share of the global auto market, and
- undermine America’s credibility on international trade issues –
all while failing to reduce the US current-account deficit.
.. other governments will now have to ask themselves why they should negotiate with a country that tears up settled agreements at will.
.. Even if forcing friends and allies to the negotiating table actually benefited US trade, it still would not be worth the loss of US soft power.