Tuesday, 19 of February of 2019

Economics. Explained.  

Trade Deficit

January 6, 2019

The trade deficit for November surprisingly narrowed by $5.5 billion to $49.3 billion after having widened by$1.1 billion in October.     Exports declined 0.6% in November.  Imports shrank by 2.9%.

The dramatic narrowing of the trade gap in the second quarter added 1.4% to U.S. GDP growth and lifted GDP growth in that quarter to the 4.2% mark.  In the third quarter the trade deficit widened sharply and subtracted 1.7% from U.S. GDP growth in that quarter and reduced GDP growth to 3.5%.  We attribute these rather volatile swings to the imposition of tariffs.  Exports surged 9.3% in the second quarter but declined 3.9% in Q3.   Imports did the opposite.  They declined 0.6% in the second quarter but surged 9.3% in the third quarter.  We do not yet know what happened to trade in the fourth quarter.  These earlier quarterly swings and the corresponding impact on GDP are dramatic, but the impact on GDP growth for the year as a whole will be negligible.  To be specific we expect trade to have little impact on GDP growth in 2018, and subtract about 0.2% from GDP growth in 2019.  Furthermore, the imposition of tariffs has not dampened foreigners willingness to invest in the U.S.  With tax cuts and deregulation boosting the pace of GDP growth in the U.S. and lifting the U.S. stock market, foreign investors find the U.S. an attractive place to invest  Capital inflows should continue apace.

We certainly support the notion of free trade.  Through trade American consumers have access to a much wider variety of goods and services at lower prices than they would otherwise.  But there are a couple of important points.  First, free traders (like us) assume that there is also fair trade.  That is the rub.  The Chinese in particular, and others, do not play by the same rules as everybody else.  Second, the yawning trade gap perhaps indicates that current trade agreements like NAFTA, as well trade agreements with Europe and Japan, were not well negotiated and allowed other countries to take advantage of the U.S.    One can make a case that the U.S. has been subsiding growth in other countries at its own expense for years.  Trump has decided that is true and has chosen to impose across-the-board tariffs.  Initially, the U.S. tariffs generated retaliation by many other countries and it appeared that a trade war was was underway.

But all of a sudden other countries began to believe that the U.S. could withstand a trade war better than anybody else and  foreign investors flooded into the U.S. stock and bond markets.  The dollar soared.  That money would be used to create new businesses, hire more American workers, and boost our stock market.  Elsewhere, the opposite was occurring.  Currencies were weakening, growth was slowing.  The U.S. was winning, the rest of the world was losing.  The question quickly became, how long could these countries withstand the pain?  The answer is apparently, not long.  A new agreement has already been reached with Mexico and Canada.  We are negotiating with Europe.  China, thus far, has not relented but we will see.

This has been a painful and perhaps scary process to see in action but, in the end, we may end up with both freer and fairer trade than we had initially.

Frequently exports and imports can be shifted around by price changes rather than the volume of exports and imports.  Thus, what is really important is the trade deficit in real terms because that is what goes into the GDP data.  The “real” trade deficit narrowed by $7.5 billion in November after having widened by $1.1 billion in October.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have almost quintupled from $4.0 billion to $21 billion, while real oil imports have fallen from $42.0 billion to $31 billion. As a result, the real trade deficit in oil has been cut by about $28.0 billion or 70% in the past several years and is the smallest since the early 1990’s.  In March of this year the U.S. surpassed Saudi Arabia and Russia  and become the world’s biggest producer of oil.  By the end of the decade it should also become a net exporter of oil.  Very impressive!

The non-oil trade gap has widened significantly  in the past year to about $72.0 billion as non-oil exports rose 1.3% while non-oil imports climbed by 3.5%.

Stephen Slifer


Charleston, SC

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