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Economic Forecasts

Rising U.S. Deficit Fans Trade War Flames

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

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Trade deadlines are piling up like the U.S. trade deficit, keeping nerves on edge about the simmering risks of an all-out trade war. A top-level delegation of Trump administration officials is meeting Chinese government representatives in Beijing to try to iron out some differences, but early signs aren’t promising. China has scaled back its imports of American-grown soybeans—one of the top American agricultural exports to that market—while the United States is pressing China to voluntarily adopt measures slashing the $375-billion deficit that the U.S. racked up in its dealings with China last year by $100 billion. Additionally, Washington already is imposing tariffs on products ranging from solar panels to washing machines to steel and aluminum from China and elsewhere. Beijing vows that it will match any U.S. tariffs tit for tat.

Meanwhile, drawn-out talks continue with Canada and Mexico on renegotiating the 24-year-old North American Free Trade Agreement, or NAFTA. Lingering areas of disagreement include the auto sector. The White House continually threatens Ottawa and Mexico City with tariffs, which it temporarily withholds, in a bid to get them to make more concessions. The March trade deficit with Mexico soared 32.8% to $8.1 billion. Against that testy background, we look for a 5%-6% widening in the trade deficit this year, to just more than $600 billion, after a steep 12.6% jump during 2017.

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Ironically, the one-month deficit on trade during March shrank dramatically—15.2%—the biggest decline in two years. Exports to the rest of the world were up 2% to a record monthly value of roughly $209 billion, while imports dipped by 1.8%. That came after a six-month run of climbing deficits, helped greatly by significantly higher overseas sales of commercial aircraft. Those are big-dollar sales that tend to come in batches, which can distort monthly trade figures. But those sales also support the manufacturing sector’s exports. The March deficit with China declined 11.6% but is still far and away the largest shortfall with any other country. President Trump maintains that other countries, particularly China, take advantage of the United States.

During the first three months of 2018, the trade gap shot up 18.5% from a year ago and now stands at $163 billion. The escalating deficit provides fodder for critics who demand tougher terms in trade dealings with the rest of the world. Nonetheless, it also reflects healthy demand both at home and abroad, which fuels American exports. U.S. businesses are also benefiting from a weaker dollar. A less robust dollar makes American-made goods more competitive in foreign markets. However, the U.S. still imports goods at a higher rate than it exports.

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Exports will continue gaining as long as a trade war is avoided. Though petroleum products are a small part of overall U.S. exports, their share is growing as oil prices recover and domestic exploration and production accelerates. March saw more corn and soybean exports. However, it’s hard to say whether those gains are sustainable given that Mexico is corn’s largest market and China is soy’s second largest. Both countries are irritated with the Trump administration’s trade policies.

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Sources: Department of Commerce, Trade Data