January Deficit Rises As Lockdown Restrictions Lift; Imports Hit Five Year High

By Kenneth Rapoza, CPA Industry Analyst

As states lift lockdowns, pent up demand from consumers and businesses are driving imports. But the data shows that where we have yawning deficits — in things like pharmaceuticals with wealthy nations — there is an urgent need to reshore and reverse the current import trend. If not, we will hit a $1 trillion deficit this year, or next. That comes at the expense of US manufacturing and its labor force.

The US trade deficit rose as expected in January to $68.2 billion, up from a revised $67 billion for December, the Bureau of Economic Analysis (BEA) said on Friday. 

At this point, we suspect the deficit will keep rising in the months ahead as states emerge from lockdown restrictions and pent-up consumer demand impacts supply chains. There is also evidence that US exports are being negatively impacted by cargo ships complying with requests from China to rush to Chinese ports empty, depriving US exporters of the shipping they need to move cargo, especially agricultural goods.

For goods, the deficit rose by $1.3 billion in January to $85.4 billion.  Our exports increased $2.1  billion to $135.7 billion in January, but imports were up by $3.4 billion to $221.1 billion total for the month of January, making it the highest monthly total in five years.

Reshoring efforts need to seriously pick up the pace, with the help of some Executive Orders signed by first Trump and now Biden on critical goods such as pharmaceuticals. Otherwise, a lot of the consumer demand that has been put on hold will mainly go to imports, with US manufacturers unable to keep up due to years of deindustrialization and other factors.

The biggest bilateral trade deficit increases for the month were with Mexico, rising $1.6 billion to $11.9 billion and Germany, up $1.5 billion to $7.2 billion in January.

Our deficit with China was $26.2 billion in January, which is around $1 billion below December’s deficit of $27.2 billion. In January 2020, just as the public health crisis was getting underway in Wuhan, our deficit for the month was $26.06 billion.

Although smaller in number, our deficit with Vietnam was $6.7 billion in January, up around $800 million.  It is by far our biggest January deficit ever with Vietnam. The country is shaping up to be an outpost for Chinese multinationals that have been offshoring due to higher labor costs, tighter regulations, and a much weaker currency in Vietnam.

Overall, our goods trade deficit is 29.2% higher than it was at this time last year. While this suggests the economy is moving again, it also stands as a reminder that the US must replace some of its imports with domestic manufacturing. A trillion dollar trade deficit is within reach for 2021 or 2022.

What We’re Buying, What We’re Selling

Worth noting, the US remains an oil exporter. It is our number one commodity export. And it is up from December, as factories get back to full swing, and we assume more people take to the road around the world. Both petroleum and crude oil export values were up, though this reflects both rising volumes and rising oil prices.

For manufactured goods, our top five exports for the month of January were mixed versus December.

We import pretty much the same items as we export. These top five imports for January, juxtaposed with our exports of the same things, show where I trade gap truly resides.

Pharmaceutical imports hit an all-time monthly high in January, up 29 percent over the January 2020 figure. The two major beneficiaries of America’s inability to make our own drugs are Germany, where pharma exports to the US rose 49 percent to $2.7 billion and Switzerland, whose exports here rose 39 percent to $2.2 billion and is the subject of a Treasury Department complaint about currency manipulation.

The rise in US pharmaceutical imports is due to multiple causes, including the decisions of pharma multinationals (many of them American) to move production out of the US, the ongoing rise in US pharma prices, and increased demand for drugs due to COVID.

“The Biden administration is taking the right actions with its priority on rebuilding US manufacturing, but in the pharmaceutical sphere, the economic trends are moving against it and actually increasing our imports month by month. The administration will need to act quickly and decisively to reverse this trend and reshore US pharmaceutical production,” said CPA Chief Economist Jeff Ferry.

Fourth Quarter 2020

Fourth quarter figures are now available with today’s release by the BEA. The fourth-quarter figures show surpluses with South and Central America ($13.2 billion), Hong Kong ($6.3 billion), Brazil ($4.2 billion), United Kingdom ($4 billion), Saudi Arabia ($3.7 billion), and Singapore ($2 billion).

Deficits of course are much larger. Fourth quarter ending deficits were: China ($80 billion), European Union ($36.8 billion), Mexico ($33.6 billion), Germany ($17.1 billion), Japan ($16.7 billion), India ($10.1 billion), Italy ($8.9 billion), Taiwan ($8.7 billion), South Korea ($7 billion), France ($4 billion), and Canada ($300 million).

The deficit with the rich European Union increased by $6.5 billion to $36.8 billion in the fourth quarter due primarily to the pharmaceuticals trade. We should be making more of this here. In this case, it is primarily tax and other incentives offered specifically to pharmaceutical giants.

The year is starting off with a glaring example of the opportunities the US has to rebuild post-pandemic: by taking a chunk out of imports.