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US Trade Gap Surged to $621 Billion in 2018, Highest in Decade

March 6, 2019
Goods deficits with China, Mexico, EU widen to records.

The U.S. trade deficit widened in 2018 to a 10-year high of $621 billion, bucking President Donald Trump’s pledges to reduce it, as tax cuts boosted domestic demand for imports while the strong dollar and retaliatory tariffs weighed on exports.

The annual deficit in goods and services increased by $68.8 billion, or 12.5%, Commerce Department data showed Wednesday. The December gap jumped from the prior month to $59.8 billion, also a 10-year high and wider than the median estimate of economists. The merchandise-trade deficit with China -- the principal target of Trump’s trade war -- hit a record $419.2 billion in 2018.

While Trump frequently cites the deficit as evidence of the failure of his predecessors’ trade policies -- even though most economists don’t dwell on the indicator -- the gap has increased by $119 billion during his two years as president. Even if he completes an accord to end the tariff war with China, substantially shrinking the deficit may prove tough as cooling global growth weighs on exports while domestic demand keeps driving shipments from abroad.

For goods only, the U.S. deficit with the world surged to a record $891.3 billion in 2018 from $807.5 billion the prior year. The merchandise deficits with Mexico and the European Union also hit records. Meanwhile, the surplus in services kept rising, hitting a record $270.2 billion last year.

For the full year, exports rose 6.3% to $2.5 trillion as shipments of goods including crude oil, petroleum products and aircraft engines increased. Imports jumped 7.5% to $3.12 trillion on purchases of items from pharmaceuticals to computers, along with services such as travel.

For December, exports fell 1.9% from the prior month, the biggest decline since early 2016, to $205.1 billion, on lower shipments of civilian aircraft, petroleum products and corn. Imports rose 2.1% to $264.9 billion, boosted by foods, consumer goods, computers and aircraft. The goods deficit was a record.

Growth Drag

The figures follow last week’s initial report on fourth-quarter gross domestic product, which showed net exports were a drag on growth for the fourth time in five quarters.

Trump’s supporters point to his talks with China and other U.S. trading partners along with the renegotiation of NAFTA as efforts that will help reduce the U.S. trade deficit.

But Trump’s trade policy also contributed materially to the growth of the gap in 2018. The tariffs he threatened and then imposed on Chinese imports caused a rush by importers to get ahead of the new duties that fueled an increase in incoming traffic at West Coast ports last year. The retaliatory tariffs Trump provoked from China also hit major U.S. agricultural exports such as soybeans: Shipments of that item fell $4 billion last year.

Moreover, his attacks and threats to impose tariffs on trading partners from China to the EU has also contributed to the slowdown in those economies and therefore their demand for American goods.

Wednesday’s figures illustrated how the trade war boosted the trade deficit with China: Merchandise exports to the Asian nation fell $9.6 billion last year, while imports rose $34 billion. For the EU, by comparison, exports and imports both surged, though imports posted a larger gain.

Additional Detail

After eliminating the influence of prices, which renders the numbers used to calculate gross domestic product, the goods trade deficit widened to $1.01 trillion in 2018 from $935.3 billion in 2017. The real petroleum gap shrank to $141.7 billion as exports increased.

Wednesday’s figures were delayed a month by the partial government shutdown. January figures are due March 27.

Exports and imports of goods account for about three-fourths of America’s total trade; the U.S. typically runs a deficit in merchandise trade and a surplus in services.

By Katia Dmitrieva

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Licensed content from Bloomberg, copyright 2016.

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