The US Trade Deficit, Explained

The S&P 500 is down 5 percent this year despite tremendous year-over-year earnings growth. One of the primary factors weighing on the market: fear over the ongoing international trade war, particularly with China. President Donald Trump has repeatedly cited the U.S. trade deficit with China as grounds for the trade war.

Let's take a closer look at what a trade deficit is, the current U.S. trade balances with its primary trading partners and whether the trade war has eliminated the China trade gap.

What Is A Trade Deficit?

In the most basic terms, a trade deficit is created when a country’s imports exceed its exports. Countries can have an overall trade deficit in which they are a net importer of goods. They can have a trade deficit with specific countries in which they buy more goods from a particular country than they sell to that same country.

Countries tend to want to export more goods than they import because a trade surplus creates an inflow of currency into the country. Countries which are not major goods producers and/or wealthy countries that purchase a lot of goods are typically the ones that end up with trade deficits. Countries import goods when domestic suppliers cannot meet domestic demand or when domestic prices are much higher than foreign prices on similar goods.

Due to U.S. minimum wage laws, protections for U.S. workers and other regulations, American companies typically have higher costs associated with producing goods than the country's trading partners. Therefore, most American trading partners simply underprice their domestic counterparts.

Major US Trade Balances

The primary focus of the trade balance discussion in 2018 has been China — and for good reason. China is both the largest U.S. trading partner and represents the largest U.S. trade deficit by a wide margin.

The U.S. and China traded roughly $636 billion in goods in 2017, resulting in a U.S. trade deficit of $375 billion, according to the Census Bureau. The deficit is nearly three times the size of the U.S. trade deficit with its next four largest trading partners combined.

The Chinese trade deficit represents about 65 percent of the total U.S. trade deficit last year, according to The Balance. The U.S. primarily imports consumer electronics, clothing and machinery from China and primarily exports raw materials and agricultural goods.

Here’s an overview of the trade balance with the top five U.S. trading partners:

• China: $636 billion in trade, $375-billion deficit.
• Canada: $582 billion in trade, $18-billion deficit.
• Mexico: $557 billion in trade, $71-billion deficit.
• Japan: $204 billion in trade, $69-billion deficit.
• Germany: $171 billion in trade, $65-billion deficit.

Trade War Impact

Trump has imposed tariffs on steel, aluminum, solar panels and other goods imported from China and other trading partners in an effort to reduce the U.S. trade deficit. The tariffs make Chinese imports more expensive for U.S. consumers, theoretically leveling the playing field for domestic companies.

Unfortunately, as of the month of October, Trump seems to be losing the trade war. In October, the total U.S. trade deficit hit $55.5 billion, its highest level in a decade. Even after enacting tariffs on hundreds of billions of dollars in Chinese goods, the U.S. unadjusted goods trade deficit with China reached $43.1 billion in the month of October, its highest level in history.

The lackluster results of the trade war may be one of the reasons Trump recently softened his stance on ramping up tariffs on China starting Jan. 1. The chart below highlights how the trade war has impacted the overall U.S. trade balance on a monthly basis throughout the past year:

U.S. Balance Of Trade (USD Millions)

Related Links:

Market Experts React To G20 Summit

Trump Threatens European Auto Tariffs, But May Have Himself To Blame For Record Trade Deficit