TEHRAN, Young Journalists Club (YJC) - The import-driven surge in the trade gap reported by the Commerce Department on Tuesday also suggests a 3 percent annual economic growth may be hard to achieve. Imports, which subtract from gross domestic product, could get a further boost from a $1.5 trillion tax cut package that became effective in January.
The fiscal stimulus comes when the economy is almost at full employment, which means the resulting increase in demand will likely be satisfied with imports.
“When an economy is at full employment, an acceleration in demand tends to be accompanied by a pickup in import growth and a wider trade deficit,” said John Ryding, chief economist at RDQ Economics in New York.
The trade deficit increased 5.3 percent to $53.1 billion, the highest level since October 2008. Economists polled by Reuters had forecast the trade gap widening to $52.0 billion in December. Part of the rise in the trade gap reflected higher commodity price increases.
The deficit surged 12.1 percent to $566.0 billion in 2017, the highest since 2008. That represented 2.9 percent of GDP, up from 2.7 percent in 2016.
The politically sensitive U.S.-China trade deficit increased 8.1 percent to a record $375.2 billion last year.
President Donald Trump has vowed to shrink the trade gap through his “America First” trade policies, which aim to shut out more unfairly traded imports and renegotiate past U.S. free trade agreements.
Trump has repeatedly threatened to terminate the North American Free Trade Agreement unless the 1994 pact linking Canada, Mexico and the United States can be made more favorable to Washington. And his administration has launched an investigation into China’s intellectual property practices that could lead to major new trade sanctions on Beijing.
“The terms of trade are not completely unfair,” said Chris Rupkey, chief economist at MUFG in New York. “Don’t forget it is American companies assembling goods outside the country and then bringing them back in which is the problem with the trade imbalance in goods.”
The surge in the December trade deficit was flagged by an advanced goods trade deficit report published in late January. When adjusted for inflation, the trade deficit increased to $68.4 billion from $66.5 billion in November.
The jump in the so-called real trade deficit at the end of the year puts trade on course to be a drag on GDP in the first quarter. Trade subtracted 1.13 percentage point from economic growth in the final three months of 2017.
The economy grew at a 2.6 percent annualized rate during that period, helping to lift growth in 2017 to 2.3 percent from 1.5 percent in 2016.
The U.S. dollar .DXY held onto gains against a basket of currencies after the data. U.S. stock index futures were mixed after two straight days of heavy losses on Wall Street. Prices of U.S. Treasuries were trading higher.
The Trump administration believes a smaller trade deficit, together with deep tax cuts, could boost annual economic growth to 3 percent on a sustained basis. Late in January, Trump imposed broad tariffs on imported solar panels and large washing machines, and is considering slapping tariffs or quotas on steel and aluminum for national security reasons.
Such actions may prove politically popular with Trump’s working-class supporters, particularly in U.S. states hard-hit by factory closures and import competition. But economists say they would likely do little to change the growth trajectory of the overall trade deficit, which is tied more to macroeconomic factors.
Goods imports increased 2.9 percent to a record $210.8 billion in December. Imports of food, capital and consumer goods were the highest on record in December.
Consumer goods imports were buoyed by a $1.8 billion increase in imports of pharmaceutical preparations. Imports of cellphones and other household goods rose by $1.7 billion, while motor vehicle imports increased by $1.1 billion.
Imports are being driven by robust domestic demand, which grew at its quickest pace in more than three years in the fourth quarter. The country’s import bill in December was also pushed up by more expensive crude oil, which averaged $52.10 per barrel, the highest since July 2015.
Imports from China fell 7.6 percent. There were also declines in goods imported from Canada and Mexico, the United States’ major trading partners.
Exports of goods increased 2.5 percent to $137.5 billion in December, the highest since October 2014. Exports of capital goods hit a record high, lifted by civilian aircraft and industrial machines.
There were also increases in exports of industrial supplies and materials. Petroleum exports increased to their highest level since August 2014.
Exports are being boosted by a strengthening global economy. A weakening dollar is also making American-made goods more competitive on the international market.
Exports to China surged 7.5 percent to a record high in December. As a result, the U.S.-China trade deficit declined 13 percent in December.