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How serious is the trade deficit? Five things to know.

Posted by IndustryNet on Thursday, March 7, 2019

In a new report released March 6th, the Commerce Department revealed the U.S. trade deficit of goods and services has reached its highest point in a decade, increasing by $9.5 billion to its current level of $59.8 billion. Total export of goods declined by $3.9 billion, while imports increased $5.5 billion.

FRED_TradeDeficit_GoodsOnly_Mar2019

When measured in terms of goods only (the U.S. currently runs a trade surplus in services) the trade deficit has reached its highest point in U.S history at $81.5 billion

Is the trade deficit as bad as it sounds?

The Federal Reserve’s Economic Data (FRED) blog pointed out in this 2017 post that the Commerce Department’s measurement of the deficit does not take prices or GDP into account when looking at trade imbalances. Keep in mind, the U.S. economy has grown significantly over the past several years, and prices have been on the rise – especially over the past twelve months.

FRED suggests adding U.S. GDP reading to the chart for a more accurate measurement, dividing the trade deficit by nominal GDP. That gives us this chart, which measures the deficit by percentage of GDP, and which shows that the current trade deficit is running at a less alarming figure of 4.4% of GDP. (See graph).

FRED_TradeDeficit_GoodsOnly_WithGDP_Mar2019

In fact, this percentage share of deficit to GDP was actually greater in the last quarters of 2005 and 2006, with a reading of 5.8% and 5.7%, respectively. Why? Because, even though the U.S. is running higher trade deficits currently, the economy is that much stronger.

Further, many economists do not look at trade deficits as necessarily a bad thing as there are a number of macroeconomic factors that feed into determining the balance of trade, and most do not point to a weakening of the economy.

Investors’ Business Daily calls the trade deficit “the most meaningless economic indicator at all”, instead referring to unemployment and economic output as more accurate measurements of economic health.

Why has the trade deficit worsened?

A number of factors have contributed to the trade deficit, including a strong dollar, which has boosted U.S. buying power with trading partners around the world; a slowing Chinese economy as well as that nation’s weakened currency; and of course, tariffs. Adding to this, the $1.5 trillion-dollar tax cut has further served to boost U.S. purchasing power.

How much of an impact did the tariffs have?

The surge in the trade deficit has brought the tariff issue to the forefront and calls into question whether tariffs, designed with the hopes to reduce the trade deficit, is really working.

Imports have been spiking since the tariff proposals were first put in place, suggesting that U.S. businesses were scrambling to procure supplies from China ahead of the initial 10% tariffs, which went into effect September 24th, and then ahead of the additional 15%, scheduled to go into effect at the start of 2019 (that deadline, as we know, was delayed).100000352_photo_shipping

This could suggest the import spree may be temporary as the two nations hash out a trade deal that might be more beneficial in the long run.

Related: China tariff increased delayed as “substantial progress” made on trade, currency manipulation.

Meanwhile, a survey conducted by The Alliance for American Manufacturing, released September 2018, found a majority of voters support giving the tariffs more time to work.

The poll, conducted by Mellman Group for the AAM found that 78% of Republican voters; 76% of undecided voters; and 47% of Democratic voters favored either keeping the tariffs or allowing them more time to work.

In the survey, 81% were in favor of addressing China’s unfair trade practices, while 54% of respondents prioritized protecting American companies and workers over avoiding a trade war.

With whom do we have a trade deficit?

The Commerce Department further broke down the numbers to highlight the trade deficit with individual countries. The report found that the U.S. deficit with China grew by $3.2 billion to $38.7 billion in December. Exports increased $0.4 billion, while imports rose $3.6 billion.

Additional December data shows the deficit with Mexico rose $2.1 billion and decreased $0.4 billion with India. The U.S. is running trade deficits with the E.U. to the tune of $15.8 billion; Japan at $5.5 billion; South Korea, at $1.7 billion; and Canada, at $0.7 billion.

The U.S. does still run trade surpluses around the world, notable in South and Central America at a $3.5 billion surplus; Hong Kong ($2.2 billion) and the U.K. ($0.6 billion).

welder sheet aluminumWhat sectors are impacted by the trade deficit?

The Commerce Department reports total export of goods declined by $3.9 billion in December.

Industrial supplies and materials decreased the most, by $2.1 billion, and capital goods decreased $1.7 billion, including civilian aircraft, which decreased by $1 billion.

Meanwhile imports of goods rose $5.1 billion.

Imports of capital goods rose $2.7 billion, with computers and computer accessories accounting for the largest share of imports.

Imports of consumer goods rose $2.4 billion and were strongest in household and kitchen appliances, cell phones, and other household goods.

Solutions for manufacturers

Changing trade policies have a significant impact on American businesses, with many manufacturers now reexamining their supply chains and searching for domestic suppliers.

Industrial marketplaces like IndustryNet help industrial buyers connect with suppliers and also provide a direct path for U.S manufacturers to increase their visibility among domestic industrial procurers.

 

 

 

 

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