Tuesday, 16 of July of 2019

Economics. Explained.  

Trade Deficit

July 5, 2019

The trade deficit for April widened by $4.3 billion in May to $55.5 billion after having narrowed by $0.7 billion April.  The $887 million trade deficit in goods for 2018 was a record high level.

If we ultimately get renewed deals with Canada, Mexico, the E.U., the U.K., and China (perhaps among others),  those agreements will call for those countries to open their markets, reduce tariffs, and import more goods from the U.S.   Thus, the trade gap may well shrink over time as exports climb.  But we are not there yet.

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.

Personally, we think the focus on the magnitude of the trade deficit is misplaced.  A $900 billion trade gap simply means that we bought more from foreigners than they bought from us.  As a result, foreigners accumulated $900 billion of dollars that will be re-invested in the U.S.   Those people might establishes businesses here in the U.S., hire American workers, or invest in our stock and bond markets.  It is not the magnitude of the trade deficit that bothers us.  But, as shown below one-half of that trade gap is with one country — China.  We do not have yawning trade gaps with Canada, Mexico, Europe, Japan, or OPEC.  If Trump is truly concerned about the magnitude of the trade deficit, he should have targeted those countries where it was the largest, namely China.  But he didn’t.  He chose to impose tariffs across the board which impacted our neighbors, friends and allies alike.  Not surprisingly, the imposition of U.S. tariffs generated retaliation by many other countries and it appeared that a trade war was underway.

But as the trade war got started investors around the globe tried to figure out which countries might fare best in a trade war.  Answer:  U.S.  Why?  Because trade is only 10% of the U.S. economy.  It is about 50% of everybody else’s economy.    Everybody loses in a trade war, but the U.S. may lose far less than others.

As other countries began to believe that the U.S. could withstand a trade war better than anybody else,  foreign investors flooded into the U.S. stock and bond markets.  The dollar soared.  That money would be used to create new businesses in the U.S., hire more American workers, and boost our stock market.  Elsewhere, the opposite was occurring.  Currencies were weakening, stock markets were falling, 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.  A deal with China may not be far off.   The pressure is clearly on both China and the U.S. to find a solution to their trade difficulties.  Growth is being hit in both countries by the standoff, but particularly so in the case of China.

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 widened by $4.8 billion in May to $87.0 billion after  having narrowed by $0.6 billion in April.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have quintupled from $4.0 billion to $21.0 billion, while real oil imports have fallen from $42.0 billion to $29.0 billion. As a result, the real trade deficit in oil has been cut by about $30.0 billion or 75% in the past several years and is the smallest since the early 1990’s.

In March of last 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 by about $6.0 billion  in the past year to about $69.0 billion as non-oil exports fell 2.1% while non-oil imports rose by 4.0%.

Stephen Slifer


Charleston, SC

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