Record U.S. Trade Deficit in 2018 Reflects Failure of Trump's Trade Policies

The U.S. Census Bureau reported that the U.S. goods trade deficit reached a record of $891.3 billion in 2018, an increase of $83.8 billion (10.4 percent). The broader goods and services deficit reached $621.0 billion in 2018, an increase of $68.8 billion (12.5 percent). The rapid growth of U.S. trade deficits reflect the failure of Trump administration trade policies, as well as the negative impacts of tax cuts and spending increases, which have sharply increased the federal budget deficit, and tightening of U.S. monetary policy, resulting in upward pressure on interest rates and the real value of the dollar.

The IMF predicts that the U.S. current account deficit--the broadest measure of U.S. trade in goods, services, and income--will nearly double between 2016 and 2022. Unless these trends are offset by a rapid decline in the value of the U.S. dollar, rapidly rising trade deficits could be devastating for U.S. manufacturing, likely giving rise to massive job loss on the scale experienced in the 2000-2007 period, when 3.5 million U.S. manufacturing jobs were lost.

The U.S. goods trade deficit with China reached a new record of $419.2 billion in 2018, up from $375.6 billion in 2017, an increase of $43.6 billion (11.6 percent). United States trade with China is dominated by the deficit in manufactured products. Although the United States has imposed tariffs of 10 to 25 percent on $250 billion in imports from China (about half of total U.S. imports from that country), China has played its 'ace-in-the-hole' by allowing it's currency to fall by roughly 10 percent against the dollar. As a result, the U.S. trade deficit with China increased faster (11.6 percent) than the U.S. deficit with the world as a whole (10.4 percent). While the United States and China are poised to negotiate a deal to end their trade dispute, the proposed deal amounts "much ado about nothing much," as Paul Krugman puts it. It will do little to reduce the massive imbalance in U.S.-China trade flows.

The vast bulk of the U.S. goods trade deficit in 2018 was explained by trade in non-petroleum products, which are dominated by manufactured goods. The trade deficit in non-petroleum products reached $825.4 billion in 2018, an increase of $91 billion (12.4 percent). The United States had a small trade surplus of 26.5 billion in agricultural products in 2018 (this sector is part of trade in non-petroleum products). The agricultural trade surplus declined by $2.4 billion in 2018 (8.3 percent), as a consequence of trade restraints in China and elsewhere, and the rising dollar. The United States had a trade surplus in services which increased from $255.2 billion in 2017 to $270.2 billion in 2018, an increase of $15.0 billion (5.9 percent). However, the growth in the services surplus was more than offset by the $83.8 billion increase in the goods trade deficit; thus the overall goods and services deficit increased by $68.8 billion (12.5 percent) in 2018.

The most important cause of large and growing U.S. trade deficits is persistent currency undervaluation by countries such as China, Japan, and Korea, which have run large, persistent trade surpluses, as well as large structural surpluses accumulated by the European Union, including especially Germany and the Netherlands. The real, trade-weighted value of the U.S. dollar increased 21.8 percent between December 2013 and December 2018, and including 6.7 percent in 2018 alone, as shown below. The Trump tax cuts will add more than $1 trillion to U.S. fiscal deficits over the next decade, putting upward pressure on interest rates and the U.S. dollar, as reflected in the chart, below. Absent aggressive efforts to reduce its value, the rising dollar will put continuing upward pressure on the trade deficit, and downward pressure on employment and output in U.S. manufacturing.