September 24, 2020

The US trade deficit shoots up to 10-year highs despite Trump's protectionism | Economy

The US trade deficit shoots up to 10-year highs despite Trump's protectionism | Economy



The escalation of the trade deficit led to the president of the United States, Donald Trump, to fly the flag of protectionism to the point of self-proclaiming the man of tariffs. But the data question his strategy of economic nationalism: it actually caused the opposite effect. The imbalance between what the world's leading power imports and exports grew to 621,000 million dollars in 2018, 12.5% ​​more than the previous year and 23% that when he arrived at the White House.

The deficit in the exchanges of goods and services registered last year is the highest since 2008 -710,000 million-, still in times of fat cows: just before the outbreak of the Great Recession that resulted from the financial crisis. A year later it plummeted to 384,000 million, and then stabilized close to half a billion. Trump's registration in 2018 is, in addition, 119,000 million higher than what it received from its predecessor, Barack Obama, only two years ago. The picture is even worse if we discount the services that the US offers abroad, where the balance is positive at 270.2 billion. In the goods segment, however, the deficit grew by 10% to 891,250 million, which marks a new record. If compared with the economy as a whole, the global deficit represents 3% of GDP, two tenths more than in 2017.

The gap in the trade balance has already reached the level of 2017 in November. In December, the deficit was around 59.8 billion, 19% higher than a year earlier. The strength of the dollar also helps to increase it: as imported goods become cheaper, the incentive to purchase products manufactured abroad increases. And vice versa in the case of exported goods: it is more difficult for US companies to sell their production beyond their borders. The fiscal expansion derived from the reduction of taxes decreed by the Republican is another factor to be taken into account: it is an impulse for consumption and, usually, as is the case, that translates into a rebound of imported volumes.

The indicator is published just as the US and China try to give a final boost to the negotiations for the signing of a pact that will park eight months of trade escalation. The deficit with the Asian giant in the category of goods was 419.2 billion in 2018, 11% higher. The threat of sanctions caused importers to anticipate the measure and exports of agricultural products such as soybeans sank as a result of reprisals.

By countries

The deficit with China is the largest among its large trading partners. The gap with Mexico follows – with whom he signed last year the renegotiation of the North American Free Trade Agreement (NAFTA), which has not yet entered into force pending the approval of the Chambers in Washington – rose to 81.520 million in the category of goods after recording an increase of 15% in one year. It remains, again, as the second highest, to widely exceed the 68.250 million deficit with Germany. Japan is the fourth with 67.630 million. With all the countries of the European Union, the imbalance between imports and exports amounted to 169,300 million, 12% more than in 2017.

Although the Republican does not hesitate to use trade as a political argument, economists tend to distance themselves from this indicator because it tends to go in the opposite direction to the economy. The increase in the deficit, in fact, is usually understood as a reflection that more is demanded than what is produced: in times of growth, as now, the trend is clearly bullish. That explains, also, that it collapses in times of recession, dragged down by the collapse of domestic consumption.

Trump promised during the 2016 election campaign to reduce the trade balance deficit by half. He used as an argument the revision of trade agreements with partners such as Mexico and Canada -the aforementioned FTA-, in the process of being approved by the US Congress.

The reduction of the trade deficit is, in the short term, the second unfulfilled promise by the Republican in the economic field. Trump also said that thanks to his plan, growth would comfortably exceed 3%. The first estimate of the GDP data for 2018 leaves it one tenth below and the Federal Reserve anticipates that this year it will moderate to 2.3%, among other reasons due to the tariff war.

Opposite effect

Threats and tariffs that apply to basic products for industry, such as steel and aluminum, had an impact on the global supply chain. The target countries, in turn, responded with their own measures. To this must be added a slowdown in the economies affected by protectionist measures. All combined slowed the demand for US products.

Trump, however, returned this weekend to direct the blame to the policy of the Federal Reserve, once again overlooking the independence that must exist between the Executive and the issuing institute. He said that it is presided over by someone –Jerome Powell– who likes to raise interest rates. That, he argues, helps reinforce the value of the dollar. The US president has previously complained that the appreciation of his currency weakens him when negotiating with China and weighs on growth.

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