The U.S. trade deficit is likely to deteriorate

April 14, 2018

U.S. trade deficit will continue to widen, based on forecasts of LogIndex’s gKNi platform, despite or even as a result of the latest threats by the Trump administration. Background: Trade tensions between the U.S. and China have increased recently, as the U.S. take a more protectionist stance toward trade. These tensions have weighed on financial markets as investors fear a trade war may be around the corner.

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Alert: gKNi estimate of US trade balance for March is below a standard deviation of the mean value. The U.S. trade deficit is expected to continue to widen in April.

“While this narrative continues to evolve, it is important to internalize that a key metric related to this debate will only get worse in the upcoming months: the US trade deficit”, writes Birgir Haraldsson, analyst and co-founder of New York-based macro strategy firm Nightberg.

The trade deficit for February came in close to where both consensus and gKNi had been anticipating it to land (at about -$57B). This adds further to the dynamic of rapidly worsening external balances that has been in place since mid-2017.

Nightberg: “Looking to the gKNi platform for deep insights on this, we can see that the projections for March and April suggest an added widening in the trade deficit. The results for March are expected at -$59.0B, and for April at -$63.0B which would take the deep trend-metrics lower.” What this means is, according to Birgir Haraldsson, that while the ‘trade war’ theme and negotiations are surrounding the scenery between the superpowers of US and China, the ‘soar’ of the trade balance is only probably to get worse over this period. “It is unlikely to offer much help at least to reduce tensions”, concludes Nightberg.

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The Chinese trade balance was even negative in March. In general, the trade balance is narrowing both in USD and CNY terms according to Global Kuehne + Nagel Indicators (gKNi).

While the Chinese trade balance seems to reach soon an equilibrium, the trade relations with the United States are still uneven. The surplus with the US jumped 19.4% to US$58 billion between January and March compared to the same period last year. Exports increased by 14.8% while imports edged higher at 8.9%.

“The sharp decline in March export growth after very solid performance in January and February suggests some exporters may have front-loaded exports this year due to concern over the possibility of a Sino-US trade war after the U.S. hiked tariffs on global imports on solar panels and washing machines,” Lisheng Wang, an economist at the financial firm Nomura in Hong Kong, told Reuters. “We believe export growth will slow due to yuan appreciation and rising trade tensions. China’s imports could be more resilient than exports in our view as China has pledged to increase imports,” Wang added.

President Trump’s fixation

Trump complains about the trade deficit frequently, saying the trade imbalance is a measure of America’s weakness on trade policy. “We lost, over the last number of years, $800 billion a year,” he said recently, while defending his tariffs against criticism.

His Council of Economic Advisers seemed to play down alarms over bilateral trade deficits. “The United States has a bilateral goods deficit and a services surplus with many of its major trading partners,” council members wrote. “The United States actually runs a trade surplus in services with China, as it does with many other countries, in part by attracting Chinese students to study at American colleges, which counts as an export.”

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Index of the exports of China to United States (in USD) to date: The surplus with the US jumped 19.4% to US$58 billion between January and March compared to the same period last year.

Most economists do not see the trade gap as money “lost” to other countries, nor do they worry about trade deficits to a large degree, The New York Times wrote. That’s because trade imbalances are affected by a host of macroeconomic factors, including the relative growth rates of countries, the value of their currencies, and their saving and investment rates. “For instance, America’s trade deficit narrowed dramatically during the Great Recession, when national consumption faltered.”

Donald Trump has long argued that the trade deficit hinders economic growth, and that reducing it will accelerate American job creation. Even those who agree with that view say, according to The New York Times, there are better ways to reduce the imbalance than through tariffs, which can backfire and further widen the trade deficit if other countries impose reciprocal tariffs.

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