Trade Deficit Moves In The Right Direction For The Wrong Reasons

The political boogeyman that is the U.S. trade deficit with the rest of the world declined in 2019 for the first time in more than half a decade – a development that on its face looks like a victory for President Donald Trump’s administration but in reality raises questions about how America’s trade relationship with the rest of the world will evolve in 2020 and beyond.

The U.S. goods and services deficit ticked up slightly in December but ended 2019 at nearly $617 billion, down 1.7%, from the year before, according to trade data published Wednesday by the Bureau of Economic Analysis. That’s the first annual decrease the U.S. has seen since 2013.

Given the Trump administration has made deficit reversing and trade restructuring key pillars of its legislative priorities, last year’s reduction in the trade deficit is in some sense a positive development for the White House, especially considering America’s goods deficit with China, specifically, fell by nearly $74 billion. Last year was the first time since Trump took office and only the second time since the end of the Great Recession that the trade deficit with China declined in any given year.

“For decades, China has taken advantage of the United States. Now, we have changed that,” Trump said Tuesday night during his State of the Union address.

But analysts have long debated the significance of America’s trade deficit with the rest of the world and have more recently questioned whether the shortfall shrunk last year for the right reasons. Looking deeper into the report, U.S. goods exports fell by more than $21 billion last year, hurting American producers in export-heavy industries such as manufacturing and agriculture.

Imports declined by a sharper $42.6 billion – in part the result of tariffs that experts believe have been largely borne by U.S. consumers and in part the result of America’s increased energy independence.

“The recent weakness in imports was at least in part due to tariffs, as importers brought forward consumer goods imports, evidenced by the August import peak and subsequent drop the next three months,” a team of analysts at Wells Fargo Securities wrote in a research note on Wednesday.

The trade deficit improved in 2019 because imports fell more sharply than exports – which isn’t necessarily improvement for the right reasons, such as stronger American export totals. The languishing U.S. manufacturing sector that appeared to dip into recession during the second half of the year suggests domestic production isn’t exactly booming in the wake of the administration’s trade shakeups.

And deficit spikes with other partners such as Mexico and the European Union in 2019 also suggest the U.S. diverted some of its dependence on Chinese goods to those produced by other nations.

Trade analysts have hoped that the signing of a partial trade deal between the U.S. and China last month would return a degree of stability to an international commerce landscape that has been upended in recent years by disputes and renegotiations with China, Mexico, Canada, Europe and South Korea, among others.

But even though China is expected to buy more agricultural products from the U.S. in 2020 than it did the year prior – when a decline in Chinese soybean purchases decimated such farmers in the U.S. – its ability to meet its end of the bargain is in serious question as the global coronavirus outbreak worsens.

“The intensifying coronavirus outbreak constitutes a large negative economic shock to China that will ripple through the global economy,” Kathy Bostjancic, director of U.S. macro investor services at Oxford Economics, wrote in a research note on Wednesday. “For the U.S. – assuming immediate disruptions to tourism, supply chain restraints for the frail manufacturing sector, and heightened uncertainty restraining business and consumer outlays – we believe the hit to GDP growth could reach between 0.1 (percentage point to) 0.2 (percentage points) over 2020, costing the economy $35 billion.”

Trump and his reelection team have already touted the U.S.-China trade deal and the revised North American trade agreement – both signed last month – as key commerce victories for the president. They are likely to carry last year’s deficit improvement into November’s presidential election as a sign that the president’s trade policies are producing their promised returns.

But the deficit is still up more than 20% from where it ended 2016, the year before Trump took office. And trade uncertainty generated in part by a Chinese coronavirus outbreak and in part by the prospects of a protracted trade conflict with the EU make it difficult to predict what 2020 has in store for U.S. commerce.