Why the Record 2018 Trade Deficit?

Financial FAQs

BEA.gov

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $59.8 billion in December, up $9.5 billion from $50.3 billion in November, revised.

This was not good news. The nation’s trade deficit shot to a 10-year high last year despite Trump White House attempts to reduce the gap, reflecting both the strength of the U.S. economy and other factors, including the Trump trade wars that have disrupted international trade flows.

The increase pushed total for the full year to $621 billion, the highest mark since the U.S. posted a $709 billion deficit in 2008 during the middle of the last recession.

For all of 2018, the goods and services deficit increased $68.8 billion, or 12.5 percent, from 2017. Exports increased $148.9 billion or 6.3 percent. Imports increased $217.7 billion or 7.5 percent.
Because the difference between imports and exports is negative, it subtracts from GDP growth, which economists have said is why full year GDP growth was slightly less than 3 percent (2.9 percent), as forecast.

The trade wars are a dumb way to attempt to correct the imbalance of manufactured products, as I said in my last post, because so many goods that Americans use are manufactured in cheaper climes, so the only way to protect American workers from cheaper foreign labor is to either invest heavily in new technologies or set up trade barriers.

The Trump team chose trade protections, which harks back to pre-Great Depression days; the era of mercantilism no longer viable in today’s closely knit world of commerce. Big Business over the past decade chose to buy back stock, rather than invest in new technologies that would enhance labor productivity.

Trade protections won’t work for several reasons. Chinese imports are at their highest level in years, and “…in a year in which Mr. Trump imposed tariffs on steel, aluminum, washing machines, solar panels and a variety of Chinese goods, the overall trade deficit grew 12.5 percent from 2017, or nearly $70 billion, to $621 billion, the Commerce Department said Wednesday,” reports the New York Times.

In fact, if the Trump administration and Republicans were really serious about rebalancing the budget and reducing the $1 trillion annual deficit predicted per the CBO by 2020, they wouldn’t have passed the 2017 corporate tax cut; or dropped out of trade alliances like the Trans-Pacific Partnership, which weakens their negotiating position.

The bottom line is no one seems to be interested in reducing either the trade or budget deficits, which is ok during good times, but will probably hasten the bad times.

We will have to watch for sharply rising interest rates, if we want to know when the next economic downturn happens. Interest rates are at record lows because foreign and domestic investors are still happy to invest their excess cash in US securities—including Treasury bonds at this time. It’s the safest haven for those that don’t have a more productive use for their accumulated wealth.

Harlan Green © 2019

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