Trump cuts China trade deficit as U.S. buys more from other partners

President Donald Trump’s tariffs shrank the U.S. trade deficit with China last year, but figures indicate that Americans turned to other countries for goods and other supplies.

Data released Wednesday by the Commerce Department showed the deficit in exports versus imports from China shrank to $345.6 billion, down about 18 percent from a record high level of $419.5 billion in 2018.

But the U.S. trade deficit in manufactured goods with all countries was relatively unchanged in 2019 at close to $1.048 trillion because importers turned to other nations after Trump hit China with tariffs ranging from 10 percent to 25 percent.

Some of the beneficiaries of that shift included Mexico, Vietnam, Taiwan, South Korea, Japan and members of the EU.

The trade deficit with the EU hit a record $177.9 billion in 2019, while the gap with Mexico was a record $101.8 billion, the Commerce Department said.

“It was a big part of the president’s trade agenda to lower the overall trade deficit, and that simply hasn’t happened on his watch,” said Dan Griswold, a senior research fellow at George Mason University’s Mercatus Center.

The overall U.S. trade deficit includes both the gap in goods trade and a surplus in services trade with the rest of the world. It totaled $616.8 billion in 2019, down more than 14 percent from 2018. But it was still 22 percent higher than $504.8 billion in 2016, the last year of President Barack Obama’s administration.

Rob Scott, senior economist with the labor-friendly Economic Policy Institute, said he suspects China of passing its goods through other countries to avoid Trump’s tariffs.

“The declining U.S. trade deficit with China was more than offset by increased imports from these other suppliers,” Scott said. “That was particularly remarkable given the slowdown in the U.S. manufacturing sector that occurred in 2019. Half of U.S. states experienced a decline in manufacturing employment over the past year, especially those in the Midwest and mid-Atlantic states.”

The big drop in the bilateral trade deficit with China gives Trump at least one bragging point, since it has risen most years since 1985, when it was a mere $6 billion.

But it’s not necessarily good for the U.S. economy because the tariffs Trump has imposed on approximately $370 billion worth of Chinese goods have increased costs for U.S. manufacturers, said Mary Lovely, a senior fellow at the Peterson Institute for International Economics, a free market policy group.

That helps explain both the slowdown in U.S. manufacturing output and slight decline in the manufactured goods trade deficit in 2019, from $1.057 trillion in 2018, after years of steady growth, Lovely said.

“What we’re importing are mostly parts and components. So when U.S. manufacturers slow down, that slows down the import of manufactured goods,” Lovely said.

On Tuesday night during his annual State of the Union speech, Trump hailed his tough trade tactics were helping to fuel a “blue-collar boom,” even though the uncertainty caused by his trade war with China helped push the manufacturing sector into a decline last year.

“Our strategy has worked,” Trump said. “Days ago, we signed a groundbreaking new agreement with China that will defend our workers, protect our intellectual property, bring billions of dollars into our Treasury and open vast new markets for products made and grown here in the U.S.A.”

China promised as part of that package to significantly increase its purchases of U.S. farm products, manufactured goods, energy and services by $200 billion over the next two years, compared to buys it made in 2017.

But an expected further slowdown this year in Chinese economic growth because of the Wuhan coronavirus epidemic has thrown that into doubt, chief White House economic adviser Larry Kudlow conceded on Tuesday. “The export boom from that trade deal will take longer because of the Chinese virus, that is true,” Kudlow said on Fox Business.

The U.S. usually runs a surplus in agricultural trade. However, that surplus shrank to $23 billion in 2019, from $26.5 billion in 2018, at least partly because of the retaliation that China and other countries on American exports imposed in response to Trump’s tariffs.

One bright spot in the trade report is the sharp drop in the oil and gas trade deficit, which fell to $29 billion in 2019, from $69.5 billion in 2018, because of increased U.S. production and exports.

The oil and gas trade deficit reached as high as $317 billion in 2008, but has fallen steadily over the past decade because of new production techniques. Last month, the Energy Department forecast the U.S. to become a net energy exporter for the first time since 1953.

“The president deserves credit for that,” Griswold said. “He’s supported ramping up of energy production and the export of liquefied natural gas.”

Trump still is mistaken to believe that the trade deficit is driven primarily by unfair foreign trade practices or bad trade deals, economists point out. Instead, other factors, such as the size of the U.S. budget deficit and the strength of the U.S. economy play a much bigger role in dictating trade flows.

“The irony is the stronger the U.S. economy is compared to our major trading partners, like the European Union and China, the more likely it is the trade deficit will go up because we will have stronger demand,” Griswold said. “The vast majority of economists would say that’s perfectly fine, but it does put this administration in an awkward spot.”

The tax cuts that Trump signed into law in 2017 are expected to increase the U.S. budget deficit to $1 trillion in 2020 and about $1.3 trillion in 2021 through 2030.

That requires the federal government to borrow more from abroad to finance the deficit, which can also increase the trade imbalance, Lovely said.

Trump could address that problem by proposing to raise taxes or cut federal spending, but those are unlikely options for him to pursue heading into an election.

An economic recession would also cut the trade deficit, as a weaker consumer would buy less from abroad — but that would be detrimental to his reelection hopes.

“When we have a recession, our imports slow down and if our country slows down faster than the other countries, we get a decrease in the trade deficit,” Lovely said.Most economists don’t expect that to happen in 2020, so it’s possible the overall trade deficit could rise this year because of stronger U.S. economic growth relative to the rest of the world, she added.

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