By Jeff Ferry, CPA Chief Economist
Data published this morning by the Department of Commerce show that US trade figures continued to worsen in December and for the year 2018, in response to the strengthening dollar, a fast-growing US economy, and a surge in imports to front-run last year’s tariffs, while President Trump’s trade measures are taking time to have an impact on the trade data.
The trade deficit in December leapt 18.8 percent to reach $59.8 billion. That meant that 2018 ended up with a full-year deficit of $621.0 billion, up 12.5 percent on the previous year and our worst trade deficit in a decade. Those figures are bad but even more worrying is the goods balance. Our trade deficit in goods for 2018 came in at $891.3 billion, up 10.4 percent from 2017 and the worst goods deficit in US and world history. Our goods deficit is now larger than the entire GDP of 163 nations in the UN.
On the bilateral front, both China and Mexico set new records in their bilateral deficit with the US. Our deficit with China for 2018 came in at $419.2 billion, 11.6 percent worse than the $375.6 billion figure for 2017. Our Mexico deficit was $81.5 billion, up a whopping 14.9 percent from the 2017 level of $71.0 billion. Number three on this list was Germany, with a 2018 deficit 7.1 percent worse at $68.3 billion. Number four was Japan, with a deficit of $67.6 billion, slightly better than the 2017 level of $68.9 billion.
It is also worth noting that for the 28-nation European Union as a whole, the US saw its deficit expand by 11.8 percent to $169.3 billion.
With the Trump administration’s ongoing trade talks with Beijing, US trade with China is in the spotlight. The 2018 figures show that our exports to China fell by $9.5 billion in 2018, largely as a result of a weaker Chinese economy and retaliation against US tariffs. Our imports from China grew yet again, by $34.0 billion or 6.7 percent, to a record $539.5 billion. China imports were driven in part by front-running of the tariffs as importers tried to import large volumes ahead of the date that tariffs became effective, and partly by the stronger dollar—which fully offset the cost of the China tariffs. Between April 2018 and year-end, the exchange value of the dollar in terms of the Chinese currency rose by 6.8 percent.
Another way to look at the gross imbalance with China is that our imports from China are 448 percent of our exports. The corresponding ratio for Mexico is just 131 percent, and for Germany 219 percent. For our global goods trade, this ratio is 158 percent.
Media criticism has focused on the jump in the trade deficit, with commentators claiming it shows that Trump’s trade policies are not working. However, trade restrictions take time to have an effect, and data in a single year can mask the underlying trend. There is little doubt that the tariffs against China have had the effect of depressing investment there, encouraging multinationals and Chinese companies alike to invest in production elsewhere (notably southeast Asia), and depressing overall Chinese economic output. Thus, the tariffs are setting President Trump up for a win in his negotiations with China, as long as he stays tough and focuses on the long-term outcome of reducing our China deficit, stopping the very long list of unacceptable Chinese trade and intellectual property practices, strengthening our national security, and rebuilding our domestic production capacity to replace Chinese imports.
Imports Surge in Pharmaceuticals, Electronics
For 2018, exports totaled $2,500.0 billion while imports came in at $3,121.0 billion. On the goods side, exports rose 7.6 percent to $1,671.8 billion while imports rose 8.6 percent to $2,563.1 billion. The services surplus was up 5.9 percent to $270.2 billion.
On the imports side, the increase in pharmaceutical imports was a striking 21.5 percent, to $133.8 billion in 2018. Other double-digit increases came in computers, up 12.6 percent to $77.7 billion. Cellphone imports rose a modest 1.9 percent to $108.5 billion.
On the export side, agricultural exports held up well, despite China’s tariffs against US farmers. Soybean exports fell $4.0 billion to $18.2 billion. However, corn exports rose $3.4 billion to reach $13.5 billion. Exports in the broader food, feeds, and beverages category, which includes agriculture, rose 0.4 percent to $133.3 billion.
“The US trade deficit continues to grow as US economic growth and the strong dollar make the US consumer the target for exporting nations worldwide,” said CPA Chief Economist Jeff Ferry. “For the US to reverse the decline of our industrial base and get back to a substantial growth in living standards for the broad population, it will take not just a better deal with China, but significant action to make the dollar competitive, and a focus on rebuilding our domestic manufacturing industry.