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Economic Forecasts

Widening Gap Fuels Trade War Intensity

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

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GDP 2.9% pace in ’18, up from 2.2% in ’17 More »
Jobs Unemployment rate will decline further More »
Interest rates 10-year T-notes at 3.2% by end ’18 More »
Inflation 2.5% in ’18, up from 2.1% in ’17 More »
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Energy Crude trading from $65 to $70 per barrel in December More »
Housing Price growth: 5.0% by end of ’18 More »
Retail sales Growing 5.1% in ’18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in ’18 More »

An intensifying trade war is widening the U.S. deficit on trade with the rest of the world with no sign of abating. The Trump administration’s “America First” policies are fueling seemingly endless rounds of tit-for-tat tariffs with China. U.S. tariffs on steel and aluminum provoked allies, including the European Union, Canada and Mexico, into imposing retaliatory penalties on U.S. exports. Threats of additional tariffs are being lobbed across the borders. To date, the U.S. and China have imposed levies on $50 billion worth of one another’s exports. And the U.S. is weighing taxing another $200 billion of Chinese goods.

Despite President Trump’s focus on trade balances with any one country as a measure of the economy’s health, his administration’s policies are more likely to widen the deficit than to cut it. High domestic demand is partly driving imports. At the same time, the U.S. dollar is appreciating as nervous investors seek safety amid rising U.S. interest rates and deteriorating conditions in many emerging markets, such as Turkey and Argentina. The stronger dollar makes U.S. goods and services more expensive in foreign markets and drags on exports.

A 5%-6% increase in the trade deficit is in this year’s cards, especially with Europe’s growth showing signs of slowing modestly while China is taking less of some major categories of U.S. exports, notably soybeans, because of the trade war between the world’s two largest economies. The Trump administration’s objective is to persuade Beijing to open its markets more fully and to compete more fairly by stepping up copyright protections, ending practices such as forced turnovers of technology as a condition of participating in Chinese markets and subsidization of state-owned businesses. So far though, the effort has stirred more rancor than cooperation from Beijing.

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At the same time, Washington is turning up the heat on neighboring Canada to fall into line with U.S. demands for changes to the North American Free Trade Agreement, or NAFTA, that Mexico has agreed upon. Talks aimed at resolving substantial differences over issues including Canada’s protections for its dairy industry, as well as modifications to an existing dispute-resolution mechanism, are under way. But Trump has warned that the U.S. won’t make concessions and is threatening stiff 25% tariffs on auto imports from Canada. Lawmakers from the many states that do business with Canada want a true NAFTA renewal, meaning all three countries are parties to it. Congress might not approve anything less, despite Trump’s assertion that the he will ink a deal with just Mexico.

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Exports decreased for a second straight month in July as the monthly deficit jumped to a five-month high of $50.1 billion. Exports dropped 1% to $211.1 billion, with the biggest declines in civilian aircraft and soybeans, which China started taxing in July. Meanwhile imports rose 0.9% to a record $261.2 billion as Americans bought more capital goods, vehicles and industrial supplies from abroad. In the first seven months of this year, the trade deficit is running 7% ahead of the total for the comparable period in 2017.

There wasn’t significant progress in shrinking key deficits with individual countries in July. The goods-trade gap with China increased to a record $36.8 billion during the month. The deficit with the European Union jumped to a record $17.6 billion from $11.7 billion in June, and the shortfall with Canada grew to $3.1 billion from $2 billion. On the other hand, the gap with Mexico narrowed to $5.5 billion from $7.4 billion in June.

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Sources: Department of Commerce, Trade Data