US Trade Deficit Grows – 06 April 2018

According to figures released by the US Department of Commerce, the US trade deficit with the rest of the world opened up to $57.6 billion in February, the largest monthly deficit seen since 2008.

The deficit was wider than predicted and partly due to an increase in foreign services purchased by the USA such as the rights to broadcast the recent Winter Olympics. Imports stood at $262 billion, a 1.7% increase over the January figure. The rise was attributed to increases in purchases of foreign civilian aircraft, computers and foodstuffs.

US exports to the rest of the world also picked up in February by the same margin of 1.7% to stand at $204.4 billion. The increase in exports was driven by vehicle sales and higher oil and natural gas exports. The deficit with China is at the heart of a brewing trade war between the nations. It came in at a surplus of $34.7 billion, from a Chinese perspective, but that was down by 2.3% from January’s figure.

The increase in imports is being driven by high levels of domestic demand in the USA (which obviously is not met by domestic supply). The application of tariffs on Chinese (and other nations’) goods does not cost exporters anything, unless they choose to lower their prices to maintain a competitive edge, but does push up the costs to domestic consumers buying them (thereby nudging inflation higher).

President Trump has instructed officials to consider a further $100 billion worth of tariffs on Chinese imports as a direct response to the Chinese decision to levy $50 billion worth of tariffs against some 106 US exports to China. It is likely that purchasing managers in China and in the USA will look at other markets to replace supplies that become uneconomical as a result of the bilateral trade war. It seems highly unlikely at the moment that any of the US’s allies will follow suit by raising tariffs on Chinese imports, so the greatest collateral damage, economically speaking, of the trade dispute will be felt by the Chinese and Americans themselves.