Economic Forecasts

Trade: Deficit Will Widen Only 1% in 2021

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

The trade deficit narrowed in December. The deficit in goods and services fell to a seasonally adjusted $66.6 billion from a revised $69 billion in November, a decline of 3.4%. But for 2020 as a whole, the trade deficit widened 17.7%, to $678.7 billion — the highest since 2008. The surge in household demand for imported goods following the onset of the pandemic was the main driving force of the larger gap. The trade balance is also weak because depressed global demand continues to hurt U.S. export growth.

A good portion of the widening in the trade deficit is likely to be temporary. Widespread vaccinations this year will result in a shift in household consumption away from goods toward services, and a gradual normalization of activity in the services sector. This would likely narrow the goods deficit, as households’ demand for imports would slow.

Pandemic-induced demand by U.S. households fueled imports, which rose 1.5% in December. Growth in imports was evenly balanced, as imported goods modestly outpaced services. Imports of goods were driven higher by inbound shipments of industrial supplies and capital goods. Services imports, by contrast, remain nearly 20% off their prepandemic level. Merchandise imports have been the quickest to recover and are nearly 4% ahead of their prepandemic level.

Exports rose 3.4% in December, with industrial supplies and automotive vehicles and parts notching the strongest gains. Services exports continued to struggle amid restrictions related to COVID-19. That has kept total exports well below their prepandemic level.

Travel exports will likely remain weak in the first half of the year. Demand for travel and transport services remains subdued because of travel restrictions across the world, triggered by the pandemic. These exports will be very slow to recover until vaccine distribution is in full swing.

China fell short of its goal to increase purchases of U.S. products last year. The Peterson Institute for International Economics estimates that China imported $100 billion in U.S. goods under the phase-one trade agreement in 2020, compared with the target of $173.1 billion. Nevertheless, exports of goods to China rose 17.1%, while imports from the country fell 3.6%. The increase in exports to China was led by products such as soybeans, crude oil, cotton and corn. All of these were covered by the phase-one agreement. The Biden administration is reviewing the previous administration’s trade policies, including whether to move ahead with the next phase of the trade agreement with China.

Sources: Department of Commerce, Trade Data

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