The US trade deficit widened in December, largely due to increased domestic demand. Imports increased, resulting in a trade gap increase of 5.3%. This translates to a $53.1 billion trade gap in December, the US importing $53.1 billion more than what it exported out of the US.
US Trade Deficit With China Major Issue
This is largest trade gap the US has experienced since October 2008. It came after $50.4 billion deficit in November. The overall deficit for 2017 was a massive $566 billion, 12.1% more than the previous year – this again was the highest since 2008. The largest issue was the trade deficit with China. This reached a record $375.2 billion last year, up from $347 billion in 2016. This represents an increase of 8.1%.
Valuation of Dollar Relative to Oriental Currencies is an Issue
A particular area of concern regarding China is the country’s excess production capacity, particularly of steel, largely state-owned. The undervaluation of the currencies of China, Japan and Korea has much to do with this situation. It has been suggested that the dollar is overvalued relative to those countries with trade surpluses and an undervalued currency. One solution would be a devaluation of the dollar, although this may harm the US in other areas.
One result of Donald Trump’s tax cuts will be an increase of $1 trillion to the US deficits over the next 10 years or so. This will tend to increase interest rates and push the dollar upward. This is in turn may well increase the balance of trade deficit.
America First Trade Policy and Trade Sanctions on China
Trump’s “America First” trade policies aim to reduce the trade deficit by eliminating unfairly traded imports, and by renegotiation of previously agrees US free trade agreements. While the President is focusing on NAFTA, between the US, Canada and Mexico, the imbalance with China continues to grow. However, the US is investigating China’s practices with intellectual property. This may lead to some major trade sanctions on China, though it has not yet been made public what form these may take.
Falling Dollar Helping US Trade Deficit and GDP
For now, it seems as if the US trade deficit, particularly that with China, may be falling. This largely due to the weakening dollar. A significant reduction could have a significantly positive effect on the US GDP. The falling dollar is also making US goods more competitive in international markets. However, a more permanent solution to this problem is ultimately needed.
