For years the U.S. trade deficit was largely ignored by the broader public, but President Trump is putting the report back in the spotlight with his threats of tariffs on foreign goods.
The size of the trade deficit in April is expected to show a small decline when the report is issued Wednesday morning. But the monthly change in the deficit really doesn’t matter, at least from a political lens. The U.S. has been running large deficits for decades and Trump won’t be satisfied until it’s dramatically reduced.
The president might not be satisfied for a long time.
The deficit in April is likely to total a bit less than $49 billion, down from $57.7 billion a few months ago. Yet the U.S. is still on track to run a larger deficit in 2018 than it did in the first full year of Trump’s presidency.
Last year the U.S. recorded a $568 billion trade gap, the largest in nine years. It’s likely to top $600 billion in 2018.
China accounts for the lion’s share of the U.S. trade deficit, though Mexico and Germany also enjoy large surpluses.
The tariffs on foreign steel and Chinese imports are meant to make a dent in the problem. The administration wants firm commitments from trading partners to help cut the U.S. deficit by a whopping 50% or more.
Yet trade talks with China, Canada, Mexico and the European Union aren’t bearing much fruit and Trump is getting an earful from Americans businesses and both parties in Washington.
The monthly trade report is likely to become a sore spot each month if the deficit remains high as virtually every economist expects.
Even if other countries agreed to open their markets more fully or restrain exports — a doubtful outcome — Americans simply need too many things such as cell phones, TVs and clothing that the U.S. either doesn’t manufacture anymore or only makes in small quantities. They’ll need to get the stuff from elsewhere and that means U.S. deficits will remain high for years.
Ironically, one way the U.S. can reduce the deficit quickly is if talk of a trade war sinks U.S. financial markets SPX, +1.08% and causes the economy to slow. Imports would probably decline faster than exports.
That’s an outcome no one wants, of course, but one that also seems quite remote. The U.S. reported a strong 223,000 increase in new jobs in May that nudged the unemployment rate down to an 18-year low of 3.8%.
A fresh report on job openings, meanwhile, is likely to show record or near-record demand for labor. Businesses are still hiring rapidly to keep up with rising sales and they’ve also increased investment at the fastest pace in several years.
The question the Trump administration has to ask is whether it’s willing to risk an economic slowdown to achieve a seemingly remote victory in trade talks that immediately results in much lower deficits. The White House figures it can handle a prolonged standoff than other countries because trade represents a much smaller portion of the U.S. economy than it does for other nations.
“The U.S. government won’t be any more willing to cut a deal if its economy stays strong this year,” said senior economist Sal Guatieri of BMO Capital Markets.