The U.S. is shifting supply chains out of China and that is becoming increasingly evident by the decline in the goods deficit with the world’s No. 2 economy, based on the latest Bureau of Economic Analysis (BEA) trade figures, released on Wednesday. A lot of the action is now shifting to Europe and Mexico, where supply chains there have led to a bigger goods gap with the U.S. so far this year than last year.
All told, the goods and services trade deficit rose 5.1% to $64.3 billion in October, with the year-to-date goods and services deficit falling 19.8% to $654.6 billion. The decline compared to 2022 is mainly due to imports falling 4%. This could be due to a combination of factors – from warehouses still full from the pandemic years, and costlier credit.
As always, the goods deficit paints a different story. The goods deficit for October was $89.6 billion, bringing the Jan-Oct total to $893.8 billion on Census basis. While the goods deficit is less than the 10-month total of $1 trillion last year, it is higher than the 2021 number of $873.5 billion and will likely end the year at $1.06 trillion. If so, it will not be a record, but will continue the trend of trillion dollar goods deficits between the U.S. and the world.
Of note, the deficit with the European Union increased $2.4 billion to $20.7 billion in October. Top items here include pharmaceuticals and automotive. The year-to-date deficit with the EU is $174.2 billion versus $163.8 billion in 2022.
The monthly deficit with Mexico rose in October over September and came in at $13.05 billion, for a total of $125.7 billion this year. Last year it was $108.12 billion in the Jan-Oct period.
Lastly, China’s monthly deficit went from $28.4 billion in Sept to $25.5 billion in October, which is an interesting decline given that the holiday season is in full swing and everything from Target to the local craft stores are chock full of Made in China Christmas decorations and toys. The trade deficit with China is $235.75 billion for Jan-Oct versus $337.5 billion for the same time last year, a nearly $100 billion decline in China imports.
“The global business community has seen the political trends and decided that investing in China for direct shipment to America no longer makes sense, and therefore U.S. imports from China are declining dramatically,” said said Jeff Ferry, chief economist at CPA. “As our imports from Mexico and the EU rise, the question is how much of that content is coming from China. A more broad-based policy to support U.S. production is necessary.”
Interestingly, the trade deficit with Vietnam is in decline over the past year, too. Vietnam has become an outpost of mainland Chinese subsidiaries and contract manufacturing. The October deficit with Vietnam was $9.9 billion versus $10.1 billion in Oct. 2022. The year-to-date deficit in goods with Vietnam stands at $86.5 billion, down from $99.8 billion last year.
Monthly trade figures are fluid and don’t give an exact picture of the trade trends, but one thing is becoming clear in this data: U.S. importers are moving away from China and sourcing more from Mexico and Europe, with Vietnam becoming a place for China to outsource manufacturing to keep market share.
China’s trade deficit with the U.S. might have peaked in 2018 and has been in decline since the imposition of tariffs, Beijing’s pandemic policies, and a general unrest among an American business community that is unsure when the next shoe will drop from Washington in relation to corporate interests there.