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Economic Forecasts

Trade Deficit Rises, Fuels Fears of Trade War

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


GDP 3.0% pace in '18, up from 2.3% in '17 More »
Jobs Big job gains will continue, but reflect a strong economy More »
Interest rates 10-year T-notes at 3.3% by end '18 More »
Inflation 2.6% in '18, up from 2.1% in '17 More »
Business spending Up 7% in '18, boosted by expanded tax breaks More »
Energy Crude trading from $55 to $60 per barrel in April More »
Housing Existing-home sales up 1.6%, new-home sales up 9.8% in '18 More »
Retail sales Growing 4.7% in '18 (excluding gas) More »
Trade deficit Widening 5%-6% in '18 More »

A bigger U.S. trade deficit at the beginning of 2018 adds to worries of a trade war breaking out as the Trump administration prepares to levy tariffs against foreign-made goods in a bid to shrink the gap between exports and imports. Allies in Europe and Canada are already threatening retaliation. So are other competitors, including China, a top exporter to U.S. markets and the target of much criticism from President Trump. No immediate relief is in sight on the trade-deficit front as a buoyant job market, rising incomes and lower taxes combine to draw in imported products favored by well-heeled consumers. We expect a 5%-6% widening in the trade gap during 2018 on top of the 12.6% jump to $568.4 billion posted during 2017.

In January, the gap in goods-and-services trade widened 5% to a nine-year high of $56 billion, the fifth straight month of a growing deficit. That development will inflame protectionist sentiment within the United States, more so because it was a result of exports contracting by 1.3% from December totals — the biggest monthly drop in more than a year — while imports were unchanged. The politically sensitive trade deficit with China jumped by 16.7% in January to $36 billion.

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The Trump administration is responding to worsening trade deficits with tariffs, tough talk and warnings that trade agreements must be more favorable to U.S. interests or be terminated. In late January, wide tariffs were levied against imported solar panels and large washing machines from Chia and South Korea. Trump now says he will impose global tariffs of 25% on steel imports and 10% on aluminum to protect domestic interests, and he’s waving off fears of a trade war because they are “easy to win,” if necessary.

Trump has suggested that Canada and Mexico might get some relief from the proposed steel and aluminum tariffs, but only if they first offer concessions in trade talks. The three countries are trying to renegotiate the 1994 North American Free Trade Agreement, though progress is halting and the U.S.’s neighbors are resisting linking the talks with the tariffs issue. The possibility that Trump will impose tariffs or potentially proceed with an oft-repeated threat to pull out of NAFTA entirely worries many U.S. industries and states, which warn of potential damage to the economy.


Today’s turmoil is ironic, in part because it comes amid an upswing in global trade. Every major region is engaged in simultaneous expansion, a relatively rare occurrence. It is an opportunity for American exporters seeking new business to do so while having the extra benefit of a weaker U.S. dollar, which helps them compete in foreign markets. The greenback’s value shot up relative to other major trading currencies in 2014 and 2015, hindering exports, but it shed about 8% of its value in 2017. The dollar has weakened further since Trump threatened additional tariffs, but that decline is now being driven by fears of a broader trade war, which could sap trading volumes.

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Sources: Department of Commerce, Trade Data