The U.S. trade deficit has been at extraordinarily high levels for many years, having ranged from $766.6 to 818.0.billion/year during 2005-2008 (2nd term of President George W. Bush). After a sharp contraction in trade during the 2009-2010 period as the country dealt with the great recession flowing from the financial crisis that started in 2008 (with resulting significantly lower trade deficits), trade deficits ran from $689.5 to $745.5 billion/year during the 2011-2016 years of President Obama’s tenure (2016 trade deficit was $735.3 billion).
President Trump has had a significant focus on trade issues during his presidency. His Administration has attempted to address the chronic trade deficit the country has developed over the last fifty years through improved trade deals, aggressive enforcement of various trade laws and some domestic actions (regulations and taxation). Despite these actions, the first two years and nine months of the Trump Administration saw a significant expansion of the trade deficit in 2017 ($793.4 billion) and 2018 ($874.8 billion) – an increase by 2018 of 18.97% over 2016 levels) – with a stabilization in the first nine months of 2019 (up 1.43% from the first nine months of 2018 at $647.6 billion).
A growth in the trade deficit during 2017-2019 reflects various causes including: (1) continued economic growth in the U.S. and slower growth rates in much of the rest of the world; (2) a delay in the trade balance effects flowing from the Administration’s trade actions against China under Section 301 of the Trade Act of 1974 and against many countries on steel and aluminum under Section 232 of the Trade Expansion Act of 1962; (3) retaliation by various trading partners for actions taken by the U.S.; and (4) shifts in currency values.
The huge trade deficit with China declined by $38.5 billion or by 12.77% in the first nine months of 2019 reflecting the large tariffs applied by the U.S. on huge parts of Chinese exports to the U.S. which exceeded the contraction in U.S. exports to China flowing from retaliation by the Chinese. However, there was more than a $47.7 billion increase in the deficit from trade flows with other countries during the first nine months of 2019. Below are some of the countries with whom the U.S. trade deficit has increased in the first three quarters of 2019 by more than $5.0 billion. Data reflect the size of the increase in the U.S. trade deficit with the particular country: :
| Country or Group of Countries | Increase in U.S. Trade Deficit 9 months 2019 |
| Mexico | $17.0 billion |
| European Union (28) | $12.0 billion |
| Vietnam | $11.7 billion |
| Switzerland | $7.3 billion |
| Taiwan | $6.5 billion |
| Subtotal | $54.5 billion |
Vietnam and Taiwan could be in some significant part the result of shifting shipments from China to neighboring countries where Chinese or other producers have investments, where producers have found alternative sourcing or where there has been shipment of products from China which have been mislabeled as to origin.
Similarly, the large increase from Mexico may reflect in part a move back to Mexico or increased sourcing from Mexico for companies previously sourcing from China. An UNCTAD Research Paper (No. 37) entitled “Trade and trade diversion effects of United States tariffs on China” released recently made similar findings for imports in the first half of 2019. https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2569. As noted in the Abstract to the paper (page 1):
“This paper finds that United States tariffs against China have resulted in a reduction in imports of the tariffed products by more than 25 percent. The analysis finds that China’s export losses in the United States have resulted in trade diversion effects to the advantage of Taiwan Province of China, Mexico, the European Union and Viet Nam among others. The analysis also finds that those effects have increased over time. The analysis finds some preliminary evidence that Chinese exporters may have started to bear part of the costs of the tariffs in the form of lower export prices. Overall, the results indicate that the United States tariffs on China are economically hurting both countries. United States losses are largely related to the higher prices for consumers, while China’s losses are related to significant export losses.”
The shift in trade balance for the mentioned countries and for the U.S. as a whole is explained in the following table which shows the change in U.S. total exports and in U.S. general imports during the first nine months of 2019 vs. the same period of 2018:
| Country | US Exports | US Imports | US Trade Balanace |
| China | -$15.2 BN | -$53.0 BN | +$47.7 BN |
| Mexico | -$4.3 BN | +$12.8 BN | -$17.0 BN |
| European Union (28) | +$14.0 BN | +$26.0 BN | -$12.0 BN |
| Vietnam | +$1.0 BN | +$12.7 BN | -$11.7 BN |
| Switzerland | -$4.5 BN | +$2.8 BN | -$7.3 BN |
| Taiwan | +$0.5 BN | +$7.0 BN | -$6.5 BN |
| Subtotal (Mex.- Taiwan) | +$6.7 BN | +$61.3 BN | -$43.5 BN |
| From all countries | =$15.2 BN | -$6.0 BN | -$9.2 BN |
Thus, in the first nine months of 2019, US trade with China fell in both directions, with imports from China declining by $53.0 billion and U.S. total exports to China declining $15.2 billion. Trade with Mexico and Switzerland saw declines in U.S. total exports to each country (-$4.3 billion and -$4.5 billion respectively) while imports from those countries into the U.S. increased (+$12.8 billion and +$2.8 billion). For the European Union, Vietnam and Taiwan, the U.S. saw total exports increase, but at much slower amounts than the increase in U.S. imports from those countries.
When looking at the 2-digit HS categories that saw the largest changes in the U.S. trade balance with China in 2019, the three largest improvements in the U.S. trade balance with China were in HS chapters 84, 85 and 94 dealing with nonelectrical equipment, electrical equipment and furniture respectively. The U.S. trade balance with China improved by $17.0 billion, $18.8 billion and $4.0 billion for these three chapters respectively, largely due to contractions in imports from China on those items. In a prior post (October 13) on the announced likelihood of a first phase U.S.-China agreement, I reviewed the contraction in U.S. exports of agricultural products, particularly soybeans, that happened in 2018 (down $10.2 billion from 2017). There has been some limited improvement in U.S. exports of soybeans in the first nine months of 2019 and so no agriculture products saw huge declines in exports in 2019 or large reductions in the US trade surplus with China this year.
Some of the U.S. trade balance improvement vis-à-vis China on these specific manufactured goods was offset by increased deficits with Mexico ($1.7 billion for Chapter 84, $1.3 billion for Chapter 85), the EU ($6.9 billion for Chapter 84), Taiwan ($4.3 billion for Chapter 84, $1.7 billion for Chapter 85) and Vietnam ($0.5 billion for Chapter 84, $7.6 billion for Chapter 85, $1.3 billion for Chapter 94).
The challenge for any administration attempting to change trade flows is the time it takes to achieve new agreements, to implement specific actions, and to design and obtain approval for new legislation. Such challenges reflect the state of play for many of the Trump Administration’s trade efforts to date. Benefits from the initial agreements with Japan signed on October 7 will likely be seen in 2020 if Japan is able to implement the agreements through legislation this month as is reported as possible in the media. Changes from the USMCA will depend on whether and when Congress takes up implementing legislation. The Administration is hoping to conclude and sign a first phase trade agreement with China yet this year. Such an agreement with China will likely result in at least a standstill on tariffs against China and likely some reductions in tariff levels phased in over time based on results of implementation efforts by both sides. An agreement with China would also improve market conditions for some U.S. products shipped to China, with reported commitments for increased purchases of various U.S. agricultural products as but one example. Discussions are ongoing with other countries on specific trade concerns, and so additional improvements in market access may yet occur during the current term of President Trump’s Administration.
Businesses understandably look for predictability in both the trade environment and the rules of engagement with trading partners. With the heavy focus on revising domestic trade policy and the aggressive use of legislative tools on the books, the Trump Administration’s efforts to date have created a great deal of uncertainty for businesses. Some businesses have been harmed at least short term, others have benefited from the actions taken by the Administration. Whether the changes being pursued by the Administration will achieve the objectives sought is an open question. A review of the changes in trade flows (U.S. imports and U.S. exports) from the Trump Administration’s first thirty-three months in office show that changes towards greater trade balance will not occur quickly nor without a fair amount of disruption to supply chains, business models and companies and many workers. A more sustainable trade environment is an important objective. Not since the early 1970s has an Administration been concerned about large and increasing trade deficits. The Trump Administration has been concerned and has been attempting to change domestic and international trade policy to restore greater balance. Whether meaningful change will occur is almost certainly a multiple Administration project. Whether the project will be pursued will depend in part on what is achieved under the current Administration.
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2 Comments
Hi, Terry! I have enjoyed reading your posts and the insight you always offer. On the deficit, what your data suggests to me is something relatively simple – the trade deficit never moves in synch with either trade liberalization or increases in border measures like the administration’s tariffs on steel and aluminum or its imposition of tariffs and other economic sanctions on China. In short, no correlation, without which there can be no causation – an obvious point that seems to escape Peter Navarro and the President, who assert that their policy preferences are predicated on reducing the trade deficit. The irony is that tax reform will do more to shrink the trade deficit than any trade policy measure. Politically, it’s a mystery to me why they don’t take credit for that and confound their critics among economists. Like Mark Twain once said, “Tell the truth – it will surprise your friends and confound your enemies!” 😛
Hi, Grant. Thanks for your comment and your insights. I agree that if one is attempting to change the trade balance for a country, a host of domestic policy decisions will certainly be important components in achieving a competitive economy. Competitive tax rates for compaies can affect investment decisions in a country (longer term will provide more domestic production; short term could be mixed based on whether equipment, etc. is domestic or imported). Reduced taxes for companies and individuals will increase (at least temporarily) GDP growth and hence increase imports. Infrastructure, sound regulatory practices, continual education for working men and women are all potentially important components to a competitive economy and hence the level of exports and import over time. Currency swings, trade barriers and trade policy including new agreements and addressing barriers overseas all influence trade flows as do comparative growth rates between countries. Whether tariff actions on particular countries move the needle on the overall trade balance depends on a range of factors as well (e.g., alternative sources of product, competitiveness of domestic producers, time for new investment or transferring sourcing, etc.). The data for 2018 and 2019 show that sectors of US exports were hard hit by retaliation moves by trading partners (e.g., agriculture, in particular soybeans to China). At the same time, when tariffs are raised on large parts of a major trading partners exports to the U.S., you see a significant contraction in shipments to the U.S. from that country (e.g., China in 2019). While most economists have for years taken the position that the size of the trade deficit or its direction doesn’t matter to a country, for those who do believe it is relevant trade policy can have an important role in long term trade reciprocity, though obviously by itself trade policy offers only a partial solution.