By Jason Cooper, CPA Research Assistant
In 2016 the U.S. ran an overall $946 billion trade deficit* in goods, seven times the 1992 level. In the 23 years from 1992 to 2016, the deficit has risen dramatically, from 1.3% of our GDP to 5.1%. Our global goods deficit is driven by deficits with a handful of countries. America’s bilateral trade deficits with 10 countries totaled $835 billion last year, equivalent to nearly 90% of our global deficit.
The U.S. has bilateral or multilateral trade agreements with most of our largest deficit countries, and in many cases our bilateral deficit has expanded dramatically after signing a free trade agreement. There is, thus, little correlation between free trade agreements and improved U.S. trade performance. Many of these countries have export-oriented growth strategies in which they rely upon the US market to consume their exports rather than increasing their internal consumption. Different industries give rise to those imbalances depending upon the country.
Top 10 Deficit Nations and Key Industrial Sectors
China is responsible for America’s largest bilateral deficit, at $337 billion, dwarfing any other. This deficit grew twentyfold over the 1992-2016 period. It is driven predominantly by machinery and electronics, which together account for well over half of the whole deficit. Toys and furniture account for another $50+ billion. In theory, such a large, persistent deficit would drive up the value of the yuan and bring China’s surplus down, but this has not happened due to a range of Chinese government policies including currency manipulation and government subsidies to export industries.
The U.S. enjoyed a small surplus with Mexico in 1992. But following ratification of the North American Free Trade Agreement, our surplus with Mexico turned to deficit and then exploded, as U.S. and global manufacturers invested in Mexico to offshore U.S. production and re-enter the U.S. market duty-free. The U.S. deficit with Mexico reached $115 billion in 2016, with the largest components being Vehicles (-$55B) as well as Electronics & Machinery (-$68B).
Japan was once America’s largest bilateral deficit partner until other nations accelerated to even larger figures. Last year, we ran a $75 billion deficit with Japan. Our deficit with Japan has not been reduced over the last few decades despite reciprocal tariff reductions through the GATT (General Agreement on Tariffs and Trade) and WTO systems.
Germany ran a $70 billion surplus with the U.S. in 2015, driven predominantly by vehicles, electronics, and machinery, but also by a $17 billion surplus in medical products and chemicals. Germany has the second largest global trade surplus in the world, and the largest in proportion to GDP.
America’s deficit with Canada was $58 billion last year. Unlike many others, it is driven almost entirely by fossil fuels. Before oil prices went down following the 2008 recession, America ran a whopping $117 billion deficit with Canada, our 2nd largest bilateral deficit at that time. The U.S. roughly breaks even with Canada on electronics and machinery, but runs a $39 billion deficit in fossil fuels and $13 billion deficit in vehicles.
Ireland and Vietnam are the 6th and 7th largest bilateral deficit partners, at $36 and $34 billion respectively, but differ from other entries in the list with regards to the major components. For Vietnam, the trade deficit is dominated by clothing and apparel. Our deficit with Ireland is mostly due to pharmaceuticals, organic chemicals, and medical equipment. Ireland’s unique status as a tax haven means the deficit is influenced not only by manufactured goods, but also by financial transactions often involving intellectual property. Both Vietnam and Ireland are WTO countries.
South Korea and Italy are the 8th and 9th largest deficit drivers, at $32 and $30 billion respectively. Both deficits are dominated by vehicles, machinery, and electronics. Our overall trade deficit with South Korea has more than doubled from the level prior to the adoption of the KORUS bilateral free trade agreement.
India is in 10th position. America’s deficit with that country rose from $2 billion to $30 billion since 1992, thanks partly to medical and apparel imports. If the Indian economy continues to grow with an export-oriented growth strategy, it is likely to become an even more important deficit driver in the future.
* These figures are based on U.S. Commerce Department data subtracting Imports for Consumption from Domestic Exports which are intended to strip out goods that enter and leave the U.S. simply for re-export, without having any significant value added to them inside the U.S. The broader measures, Total Exports and General Imports, include the re-exported goods that merely passed through the country, often resulting in an appearance of a less significant trade deficit. The US International Trade Commission has often used the narrower Imports for Consumption and Domestic Exports numbers in reports to congress including the 2007 report on the Korea-US trade agreement.