In a blow to Trump, US' trade deficit hit record $891 billion last year

The widening gap was exacerbated by Trump's $1.5 trillion tax cut, which has been largely financed by government borrowing, and the trade war he escalated

America’s trade deficit with the rest of the world rose to its highest level in history last year as the United States imported more goods than ever, including a record amount from China, ballooning the deficit to $891.3 billion and delivering a setback to President Trump’s goal of narrowing that gap.

The increase was driven by some factors outside Mr. Trump’s control, like a global economic slowdown and the relative strength of the United States dollar, both of which weakened overseas demand for American goods. But the widening gap was also exacerbated by Mr. Trump’s $1.5 trillion tax cut, which has been largely financed by government borrowing, and the trade war he escalated last year.

The trade deficit is the difference between how much a country sells to its trading partners and how much it buys. Mr. Trump has long boasted that his trade policies would reduce that gap, which he views as a measure of whether partners like China and the European Union are taking advantage of the United States, a diagnosis that few economists share.

Instead, in a year when Mr. Trump imposed tariffs on steel, aluminum, washing machines, solar panels and a variety of Chinese goods, the trade deficit grew by 12.5 percent from 2017, or nearly $70 billion dollars, the Commerce Department said Wednesday.

In December, the overall goods and services deficit rose to $59.8 billion, up 19 percent from the previous month. It was the highest monthly trade deficit in a decade.

The United States also imported a record amount of goods from China last year, despite Mr. Trump’s trade war with China and the imposition of tariffs on $250 billion worth of Chinese goods. The trade gap in goods between the United States and China hit $419 billion in 2018, deepening a bilateral deficit that has been a particular source of anger for Mr. Trump.

The widening gap is partly the result of Mr. Trump’s trade war with Beijing, which has slowed American exports to China. Those exports declined by nearly 50 percent in December, compared to the same month a year before, as American companies were hurt by a slowdown in the Chinese economy and retaliatory measures that Beijing has leveled on American goods. A stronger American dollar, which makes United States products more expensive overseas, and a weaker Chinese yuan also offset some of the impact of Mr. Trump’s tariffs.

Mr. Trump views the trade deficit with China as a
sort of economic scorecard for which country is on top. Most economists disagree with this perspective, viewing trade deficits as neither a sign of economic strength nor weakness, but a function of macroeconomic factors like investment flows, fluctuations in the value of currency and relative growth rates.

As the trade deficit widens, Mr. Trump’s focus on it has resulted in a particular irony: By his own metric, the president is failing to right America’s global trading relationships. Yet many of the president’s critics don’t blame him for this, saying some fluctuations in the trade deficit are largely beyond his control.

Several global economic factors explain the widening of the global trade deficit last year. China’s slowdown has reduced consumer appetite for American goods, as has slowing growth in Europe. The strength of the dollar in global currency markets has made it cheaper for American consumers to buy foreign-made goods, and more difficult for foreign customers to buy American-made ones.

The value of the Chinese yuan, which is determined partly by the market and partly by the government, weakened against the dollar last year and started rising again in the fall, as Chinese President Xi Jinping met Mr. Trump in Argentina in November to begin hammering out a trade pact, said Brad Setser, a senior fellow for international economics at the Council on Foreign Relations.

“China certainly allowed the market to push the value of the yuan down against the dollar over the summer,” Mr. Setser said.

The relative strength of the United States economy is also a large factor in the widening deficit, along with the $1.5 trillion tax cut Mr. Trump signed in 2017, which helped boost growth last year.

Money from the tax cuts helped Americans buy more imported goods than ever before in 2018. And to finance the tax cuts, the government needed to borrow more dollars, some of which came from foreign investors. Foreigners primarily get those dollars by selling more goods and services to Americans, which will necessarily widen the trade gap, an effect that many economists predicted at the time Mr. Trump signed the tax cuts.

The cuts are also helping to swell the federal budget deficit, which Mr. Trump similarly pledged to reduce — and, in fact, eliminate — as a candidate. On Tuesday, Treasury Department figures showed the budget deficit widening, and is on track to top $1 trillion this fiscal year. Revenue from personal and corporate income taxes was down by 9 percent in January, compared to the same month a year ago.

As with the trade deficit, many economists are growing less alarmed by the budget deficit. However, Federal Reserve officials and some economists warn federal borrowing is on an unsustainable path and will ultimately hurt the American economy. The Fed chairman, Jerome H. Powell, warned lawmakers at a House hearing last week that the federal debt was on an “unsustainable” path.

Mr. Powell was asked during the hearing if he would also say that the trade deficit was unsustainable. “I don’t think I would say that,” he replied.