The US trade deficit swelled in December, and the $53.1 bln shortfall was
a bit larger than expected. It was the largest deficit since October
2008. For the 2017, the US recorded a trade deficit of goods and services
of $566 bln, the largest since 2008.
The deterioration of the trade balance may be worse than it
appears. There has been significant improvement in the oil trade balance.
In 2017, the real petroleum balance was just shy of $96 bln, the smallest in 14
years. The non-oil goods deficit of almost $740.7 bln was a new record.
Exports rose 1.8% in December to $203.35 bln. This is a
record. There was a record shipment of capital goods, and increases in
industrial supplies and materials. Exports rose 7.3% in 2017.
Imports rose 2.5% in December to a record $256.5 bln. Imports rose 9.5%
in 2017. There were record purchases of foreign produced consumer goods
and capital goods.
Trade is a central issue for the Trump Administration. It
argues that the chronic trade deficit is a function of bad trade deals and
other countries taking advantage of the US. Tariffs and quotas were
recently levied on solar panels and washing machines. Additional action
may be pending on steel, aluminum and intellectual property
rights.
The Trump Administration seems particularly sensitive to trade patterns
with China and Mexico. The goods deficit with China widened 8.1% last
year to a record $375.2 bln. The goods deficit with Mexico increased by
10% to $71.1 bln, the most in a decade. What the net figures conceal is
that the US merchandise exports to both China and Mexico were records.
Imports from Mexico and China were also records.
Net exports were estimated to have subtracted 1.1 percentage points from
Q4 GDP, and the risk is that it was a slightly larger drag. When
adjusted for inflation, the real goods deficit widened to $68.4 bln from $66.5
bln in November.
McKinsey Global Institute (MGI) published a report last year on
manufacturing. The report noted that only 1% of US companies export,
making a shallow base. Moreover, MGI argued that the US manufacturing
sector has been starved for investment. Private sector investment in US
manufacturing was estimated to be near 30-year lows. The average age of
US factories is 25 years, while average age of equipment is around nine
years.
MGI argued that it would cost $115 bln a year for a decade to fix the
situation. The combination of tax cuts and liberalized depreciation
rules are thought to help facilitate new private investment. However,
companies did not lack for resources and the price and access to capital did
not seem to be the main obstacle in the first place.