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The Trade Deficit Surges

Summary:
To a 14 year high (in absolute terms, not as a share of GDP). Shrinkage in US-China deficit stalls. Figure 1: US goods and services trade balance (blue), and US-China goods trade balance, 12 month trailing moving average (brown), both in millions of $. Gray dashed line at NBER defined peak. Orange shading denotes trade war dated from March 2018. Source: BEA/Census via FRED, and author’s calculations. While the trade balance improves slightly during the trade war (shaded orange) pre-pandemic, I’d attribute that development more to macroeconomic conditions. The goods trade balance pre-pandemic was increasing, but from the pandemic onward, has trended sideways, with a downward move in latest months. This is merely an illustration of the point that tariffs and other trade barriers will to a

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To a 14 year high (in absolute terms, not as a share of GDP). Shrinkage in US-China deficit stalls.

The Trade Deficit Surges

Figure 1: US goods and services trade balance (blue), and US-China goods trade balance, 12 month trailing moving average (brown), both in millions of $. Gray dashed line at NBER defined peak. Orange shading denotes trade war dated from March 2018. Source: BEA/Census via FRED, and author’s calculations.

While the trade balance improves slightly during the trade war (shaded orange) pre-pandemic, I’d attribute that development more to macroeconomic conditions. The goods trade balance pre-pandemic was increasing, but from the pandemic onward, has trended sideways, with a downward move in latest months. This is merely an illustration of the point that tariffs and other trade barriers will to a first approximation only re-allocate the trade deficits between countries.

The dollar strengthening — due to safe haven effects exacerbated by policy uncertainty surrounding Trump’s erratic trade policies — worked against trade deficit shrinkage.

The Trade Deficit Surges

Figure 2: US goods and services trade balance, in millions of $ (blue, left scale), and real value of dollar against broad basked of currencies, in logs 2006M01=0 (red, right scale). Gray dashed line at NBER defined peak. Orange shading denotes trade war dated from March 2018. Source: BEA/Census via FRED, and author’s calculations.

It is interesting to see the rapidly increasing deficit occur against a backdrop of slow economic growth; consumer goods accounted for a large component of the increase in imports, so may represent the shift in consumption patterns specific to the pandemic.

Update, 5:35 PM Pacific:

Reader pgl asks how much is due to changes in imports vs. exports. Figure 3 shows that the deterioration in November was driven by import increases.

Figure 3: Change in exports (blue bar) and minus change in imports (brown bar), in millions of $ Source: BEA/Census via FRED, and author’s calculations.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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