Trade Deficit Forecast

Economic Forecasts

U.S. Trade Gap Narrows but Exports Fall

Kiplinger's latest forecast on the direction of the trade deficit.

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Trade deficit Widening 7%-8% in ’19 More »

There’s modest progress this year in controlling the growth of the U.S. trade deficit, but it’s happening for the wrong reasons. The Trump administration’s escalating tariff battle with China, along with threats to levy penalties against imports from Mexico, is casting a pall of uncertainty over global economic prospects and contributing to shrinking world trade volumes. President Trump’s strategy of coupling punitive tariffs on imports with negotiations initially was aimed at China, the main cause of persistent U.S. deficits, but now is targeting Mexico and Europe as well. Talks between Washington and Beijing have been stalled since early May. Trump is threatening tariffs against Mexico to force greater cooperation in curbing illegal immigration to the United States through the southern border. A major fight is shaping up with Europe over a free-trade pact because Brussels won’t open its agricultural markets as wide as Washington wants it to. And the administration is threatening penalties against auto imports from Germany and other European countries. Trump is also threatening to tax about $300 million worth of additional Chinese imports. He already penalized $250 billion worth, meaning that virtually everything China sends the United States would be subject to tariffs.

Washington wants a binding, enforceable deal that would protect American intellectual property and grant greater access to the Chinese market. An agreement looked imminent before talks stalled last month amid mutual allegations of reneging. The International Monetary Fund and the World Bank warn that the dispute is harming the global economy. Also, speculation is growing that the Federal Reserve will be forced to reduce interest rates to ward off damage to domestic economic growth.

The monthly deficit on trade fell 2.1% to $50.8 billion in April. But both exports and imports contracted by 2.2% from March. Strong domestic and world economies would have pushed up both. Overseas sales of aircraft, petroleum and vehicles fell sharply. Purchases from abroad of capital goods, vehicles and consumer goods were down, signaling that both business and household spending could be slowing. Businesses face difficult planning decisions and disruptions to their supply chains while they try minimizing the tariffs’ effect on their costs. Consumers inevitably will see higher prices for many products.

See Also: 10 Companies Already Hurt by President Trump's Tariffs

But there’s still a strong chance that the trade deficit will reach a record $665 billion this year, a 7% to 8% increase. During the first four months of 2019, the deficit increased only 2% from the corresponding period last year. But that covers the period before tariffs were increased to 25% on $250 billion of Chinese imports. China is retaliating by buying fewer American goods, particularly commodities such as soybeans, and is shifting to other producers such as Brazil. Meanwhile, the U.S. economy is humming better than most, so it will keep taking in more imports and sending out fewer exports. Some export categories, such as civilian aircraft, could be in a lengthy decline. For example, Boeing is struggling to get aviation authorities to put its 737 Max back in the air and must also win back airlines’ trust.

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Sources: Department of Commerce, Trade Data