How Out-Of-Whack are US Trade Relationships? 2017 Trade Deficit Worst since 2008

Trade deficit in non-petroleum products hit a record of $734 billion.

by Wolf Richter • 

2017 was a banner year for the US trade deficit, according to the Commerce Department’s report today. Corporate America’s supply chains weave all over the world in search of lower costs. Other countries have an “industrial policy” designed to produce trade surpluses for them. This combo ballooned the US trade deficit in goods and services to $566 billion, up by $61 billion, or 12%, from 2016. It was the worst trade deficit since 2008.

While exports of goods and services rose by $121 billion, to $2.33 trillion, imports surged by $182.5 billion, to $2.90 trillion.

Exports add to the economy and to GDP; imports subtract from GDP. A big trade deficit is a negative for the economy. This trade deficit of $566 billion is big even in relative terms: 2.9% of GDP, up from 2.7% in 2016.

The trade deficit in goods alone (without services) was $796 billion. As the trade deficit in petroleum and petroleum products shrank due to surging oil production in the US, the trade deficit in non-petroleum products hit a record of $734 billion.

The goods trade deficit with China, Japan, and Germany combined amounted to $453 billion!Years ago, when the trade deficit in goods began to balloon, it was deemed no big deal because the US would export innovative services, and this trade surplus in services would make up for the deficit in goods. That didn’t work out. Then, as the overall US trade deficit ballooned, it was deemed no big deal because soaring imports showed that the US economy was healthy, driven by consumer demand, according to an endless series of economists and politicians. Meanwhile, Corporate America perfected offshoring production and importing from cheaper countries.

Then came Trump with a renewed focus on the trade deficit – something that should have been done 25 years ago, when trade wasn’t that far out of balance. But even with this renewed focus, the problem just got worse.

Here are the countries with which the US has the largest trade imbalances in goods (services not included). In terms of China, since a lot of merchandise is transshipped and/or invoiced via Hong Kong, I netted China’s and Hong Kong’s numbers in one line. I included the EU (purple bar) for memo purposes, though it is not a country and though some member states are also included in the chart:

The opaque nature of some of the trade dealings – transshipments, trade invoicing, tax issues, etc. – can skew trade data. For example, the US had trade surpluses of $24 billion and $15 billion with the Netherlands and Belgium, not because the end-users of US products are in the Netherlands and Belgium but because Rotterdam and Antwerp are the largest and second-largest seaports in Europe, and thus key for the US-EU shipping route for countries that have less convenient or no seaports.

Ireland, with which the US has a trade deficit of $38 billion as the chart above shows, isn’t actually a huge goods supplier of the US. It’s where many US companies shelter part of their profits from US taxes, and some of the trade invoicing is routed through their mailbox entities there.

Biggest partners in the trade deficit of goods:

  • China: the deficit jumped by $23 billion, with imports surging by $43 billion and exports rising by $20 billion.
  • Mexico: the deficit increased by $8 billion, with imports surging by $20 billion and exports rising by $12 billion.
  • Japan and Germany: the deficit remained about flat, with both imports and exports rising with each country by about $4 billion.

The US increased its trade deficit with the EU by $5 billion, mostly via gains by Ireland and Italy, as imports surged $18 billion, and exports rose $13 billion.

The chart below shows US imports (red) and exports (black), in order of the trade deficit (imports minus exports, with the EU color-coded differently):

And here are the problem countries:

  • China/Hong Kong exported to the US 3 times as much as it imported from the US.
  • Japan exported to the US 2.2 times as much as it imported.
  • Germany exported to the US 2.2 times as much as it imported.

By contrast, Mexico exported to the US 1.3 times as much as it imported from the US. And trade with Canada was close to being in balance, given the huge bilateral trade.

So there are two categories of countries with which the US has a trade deficit: Those that import from the US relatively little compared to their exports to the US – China, Japan, and Germany; and those with which the US has a booming bilateral trade, primarily Canada but also Mexico. Canada, with a population the size of California’s, imports as much from the US as the entire EU combined!

Clearly, Canada isn’t a problem in the long-running US trade fiasco. And given how much Mexico imports from the US, it isn’t the top problem either. Instead of hounding both countries, current NAFTA re-negotiations should carefully tweak the trade relationships. But concerning China, Japan, and Germany — the countries that together account for 80% of the US trade deficit — some good ol’ hounding would be appropriate.

Corporate American plays an outsized role in the trade deficit, and removing incentives to offshore production would be a good first step. This is going to cause a lot of squealing overseas and in boardrooms of Corporate America. But it should have been done 25 years ago before trade relationships got this far out of whack.

The corporate bond market is next, after the Treasury market has already taken a hit. It’s only a question of how disruptive the adjustment will be, whether it will be just a painful sell-off or junk-bond mayhem.