U.S. Trade Deficit Last Year Was Widest Since 2012 President Trump is setting out to narrow the gap in an effort to bolster the economy.
The U.S. logged a $502.25 billion trade deficit in 2016, the largest in four years and a gap President Donald Trump is setting out to narrow to bolster the U.S. economy.
The new president faces obstacles in the coming months and years, including the potential for a stronger dollar, larger federal budget deficits and low national saving rates compared with much of the rest of the world, all of which could force trade deficits to widen.
As in past years, the 2016 gap reported Tuesday by the Commerce Department reflected a large deficit for U.S. trade in goods with other countries, offset in part by a trade surplus for services. The gap in terms of goods only was $347 billion with China last year, $69 billion with Japan, $65 billion with Germany and $63 billion with Mexico.
For December, the total trade gap decreased 3.2% from November to a seasonally adjusted $44.26 billion. Exports rose 2.7%, including increased sales of civilian airplanes and aircraft engines. Imports were up 1.5% in December, including a rise in car imports.
During the presidential campaign, Mr. Trump and some of his economic advisers said he would seek to boost economic growth and support U.S. manufacturing jobs by reducing the nation’s trade deficit and thus increasing net exports. He said his administration will negotiate better deals with other countries, and he has also threatened to levy tariffs on some imports.
“We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs,” Mr. Trump said in his Jan. 20 inaugural address. “Protection will lead to great prosperity and strength.”
The interplay between trade, growth and employment is complex and difficult to manage. The U.S. has run trade deficits for decades, during periods of expansion and low unemployment as well as during recessions and high unemployment.
The gap widened starting in the late 1990s with China’s emergence as a world trading power and recent research shows a surge of imports from China put downward pressure on U.S. wages and manufacturing employment. Economists generally say trade has overall if uneven benefits, including lower prices for consumers.
In 2016, the total deficit rose modestly from the prior year to its highest dollar level since 2012. But it shrank slightly to 2.7% as a share of U.S. economic output after hovering at 2.8% of gross domestic product in 2013 through 2015.
The gap fundamentally reflects the fact that Americans consume more than they produce relative to the rest of the world. To shrink the gap, they would either have to produce more or consume less.
If Americans consumed less, the deficit could contract along with the broader economy, as happened during the 2001 and 2007-2009 recessions, leaving workers no better off. To produce more, U.S. firms could export more or take market share from imports. Tariffs could help that happen, but other countries might retaliate.
Former President Barack Obama, in a bid to boost economic growth, in 2010 set out to double the nation’s exports in five years. But he fell well short of that goal due in part to shaky demand overseas and a stronger dollar.
The dollar’s rise since Mr. Trump’s election could present a headwind for export demand because it makes U.S. goods and services more expensive overseas. The U.S. currency has appreciated 23% since July 2014 and by 2% since Mr. Trump’s election, according to Federal Reserve data.
Moreover, the new president’s stated desire to cut taxes and increase government spending could expand the federal budget deficit, a phenomenon that in the past has been accompanied by a wider trade gap.
“We may be now seeing a return of the ‘twin deficits’ that we saw in the 1980s and the 2000s,” said Harvard University economist Jeffrey Frankel, a former member of the White House Council of Economic Advisers under President Bill Clinton.
There is “tension” between Mr. Trump’s goals on fiscal policy and trade, said Matthew Slaughter, dean of the Tuck School of Business at Dartmouth College and a former White House economic adviser to President George W. Bush. “The desire for fiscal expansion…will tend to increase the trade deficit’s overall size, not reduce it,” he said.
There is much uncertainty about how efforts on Capitol Hill to craft a tax-code overhaul could affect trade, as well as what actions the Trump administration might pursue on trade agreements and tariffs in the coming months.
“If there is some type of tax effort or reform put out that has an advantage relative to exports, we’ll more than likely get a significant tailwind from that,” Raytheon Co. Chief Executive Tom Kennedy told analysts in late January.
But “you have to be worried about a trade war,” Honeywell International Inc. Chief Executive David Cote told analysts last month. “If it gets to that point, it’s not going to be bad just for trade, but it’s going to be bad economically.”