uploads/2020/01/trade-deficit.jpeg

US Trade Deficit Tumbles: Trump Winning the Trade War?

By

Updated

  • The US trade deficit fell to a three-year low in November. President Trump has vowed to address the country’s massive trade deficit, especially with China.
  • A lower trade deficit should boost US economic activity. While the falling trade deficit shows that President Trump is winning the trade war, some other studies have shown that the trade war and tit-for-tat tariffs are hurting the US employment market.
Article continues below advertisement

US trade deficit

The US trade deficit fell to $43.1 billion in November—its lowest level since October 2016. President Donald Trump talked about addressing the massive US trade deficit during his 2016 election campaign. He also spoke about renegotiating some existing trade deals he felt weren’t favorable for the US. He especially criticized NAFTA (North American Free Trade Agreement) and China’s trade policies.

Despite Trump’s trade war and tariffs, the US trade deficit rose more than 10% to a record high in 2018. There were two reasons for the surge in the deficit in the year. Firstly, the US economy was growing at a fast pace, so it led to higher imports. Secondly, US importers stocked up in advance of the tariffs that were scheduled to take effect on January 1, 2019.

Trade deficit finally narrows

The US trade deficit has finally narrowed, primarily due to fewer imports from China. Over the last few months, China’s exports to the US have tumbled. With that said, some analysts don’t seem too excited about the lower US trade deficit. Jeffrey Kleintop, Charles Schwab’s chief global investment strategist, said, “Falling imports in every major category are what we see in this report, and that includes capital goods. That is not a good sign for business investment.” Corporate investment activity has sagged despite President Trump’s tax cuts. US businesses have instead used the cash for buybacks.

Article continues below advertisement

Is Trump winning the trade war?

Last month, the US, Canada, and Mexico signed the USMCA (United States–Mexico–Canada Agreement), which will replace NAFTA. The agreement was signed in 2018, but it was renegotiated to accommodate some changes sought by US Democrats. The Senate still needs to ratify the USMCA. Phase 1 of the US-China trade deal also looks to be on track. The two countries are expected to sign the deal this month. If the USMCA and Phase 1 of the deal go through, they’ll be significant wins for President Trump in the trade war. The deals could help narrow the US trade deficit even further.

US economy

However, it’s not like the trade war hasn’t hurt the US economy. A study by the Federal Reserve found that Trump’s tariffs have done more harm than good. President Trump hasn’t had the best of relations with the US Federal Reserve. He criticized former Chair Janet Yellen for not raising rates during his 2016 campaign. In his presidency, he then criticized Chair Jerome Powell for raising rates! The Fed’s rate hikes were among the factors that triggered the sell-off in the Dow Jones Industrial Average (DIA) and the S&P 500 (SPY) in the fourth quarter of 2018.

While Trump has frequently said that China is paying for the tariffs, a recent study has found that US consumers are actually footing the bill. Read Does Trump’s Trade Theory Back Up Trump’s Steel Tariffs? for more analysis.

Advertisement

More From Market Realist