Trump's Plan to Supersize US Trade Deficit, Pt. II

Up, up and away: the incredible exploding US trade deficit.

Contrary to his rhetoric, I noted some posts ago that Trump is actually doing all he can to widen the US trade deficit. The last GDP report for the second quarter for 2018 was artificially boosted by Americans trying to beat the imposition of tariffs on goods imported by China. However, we have passed that point. Now that tariffs are already beginning to be imposed, American importers no longer have the impetus to "beat" some tariff imposition deadline. Voila, today's trade deficit that was far larger than anticipated $-75.8B instead of $-70.8B--though humbly not be me.

So, what will drive the United States' trade balance in the age of trade war are likely two: First, American exports are being hit abroad by other countries' retaliatory tariffs on American goods. This is particularly the case with soybeans and other agricultural exports now being taxed more by the Chinese. Second, American imports continue to climb, demonstrating the ineffectiveness of tariffs in "reducing" trade deficits when domestic saving shortfalls are not addressed. If not China, then there are several other countries willing and able to supply America's fix of imported goods since the United States still needs to plug its current account deficit somehow.

The merchandise-trade deficit unexpectedly grew in August to $75.8 billion, the widest in six months, as exports of food, industrial supplies and autos declined, Commerce Department data showed Thursday. 

While analysts said the trade deficit partly reflected an expected drop in soybean exports following a second-quarter surge ahead of Chinese-imposed tariffs [...], the numbers illustrate how the trade war is spurring volatility in the data. In addition, the widening deficit runs contrary to Trump’s aim of a narrower gap and underscores the challenges of achieving that goal amid strong domestic demand -- which tends to boost imports -- and retaliatory tariffs from abroad.

“The data are grim,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said in a note, referring to the August goods trade gap. “The administration’s narrative, that the second-quarter drop in the deficit was a result of their trade policies, has now fallen apart, as it was always likely to do.”

The bottom line is this: the Q2 GDP growth figure was artifactual, boosted as it was by American buyers stocking up on China-made goods ahead of tariffs being applied. Now that that tomfoolery is done with, we are beginning to see what the trade war-era pattern will be like. The trade deficit will likely increase, not decrease, since the United States domestic saving shortfall still keeps growing (via Trump's tax cuts). That the US dollar is gaining strength only makes the trade deficit worse as it makes imports more attractive to Americans and exports less attractive to the United States' trading partners.