U.S. trade deficit rises to highest level since 2008, fanning criticism of Trump

Reporting from Washington —  Despite President Trump’s vow to reduce the United States’ large trade deficit, the nation’s long-standing imbalance with the rest of the world widened substantially during his first year in office, to the highest level in almost a decade.

The Commerce Department said Tuesday that the U.S. trade deficit in goods and services, which had changed little in 2015 and 2016, surged 12% last year to $566 billion, the most since 2008.

The report was largely expected, but it nonetheless provided fresh grist for longtime critics of Washington’s trade policy to hammer the president and his administration to take a harder line on trade, particularly with China, which accounted for almost half of the trade gap in goods.

“Are we just going to talk tough or when you come back a year from now are we going to see a different chart?” said Rep. Brad Sherman (D-Porter Ranch) as he confronted Treasury Secretary Steven T. Mnuchin during a hearing Tuesday by showing a table of the deficit with China rising every month since Trump took office.

Mnuchin responded, “I think you’re going to see a different chart.”

The new data could embolden Trump to take action, although that remains to be seen. Barring significant trade measures, a weakening of the dollar and stronger economic growth abroad should help lift American exports this year, but imports also are likely to keep expanding.

The new tax cuts and other incentives for corporations could help boost investment and manufacturing in the United States, but the change to a territorial tax system also could spur more production activity in other countries with lower tax rates.

While some see the big trade deficits as inherently bad for American industries and workers, many economists would not be alarmed by the trade imbalance, large as it was, given the context of the expanding U.S. economy. Growing investment and spending in the U.S. means businesses and consumers are buying more foreign goods, from crude oil to computers to cellphones.

U.S. exports also rose in December and all of 2017, with more shipments of things like oil, industrial machinery and aircraft engines. But the 5.5% increase in exports was about a percentage point slower than the growth of imports.

U.S. exports of services, such as licensing fees and management services, did not increase enough to make up for the shortfall in the exchange of merchandise. The U.S. enjoys a large trade surplus in services with the world.

A larger-than-expected net trade deficit would likelyprovide a drag on U.S. economic growth in last year’s fourth quarter, a small accounting change.

Much more significantly for Trump, the double-digit percentage jump in the trade deficit in his first year in office presents a political challenge.

Unlike his predecessors, he has put extraordinary emphasis on the trade balance numbers, regarding them as a key scorecard of U.S. economic health and American commercial relations with individual countries.

As a candidate and as president, Trump has promised to upend the way America does business with the world to halt and reverse trade deficits. And with that in mind, his administration has undertaken to renegotiate the North American Free Trade Agreement and the U.S. trade pact with South Korea.

But the new trade data reported Tuesday not only raised hackles of long-time critics of Washington’s trade policy but provided fresh ammunition to those who want to pressure Trump to follow through on his promise to get tough on trade, especially with China.

While U.S. trade deficits rose with most every region and country in the world, China accounted for nearly half of the $810-billion merchandise trade gap with the world last year. The U.S. bought $375 billion more of goods from China than the other way around.

“The numbers tell the story. He’s been in office a year now and the trade deficit is up,” said Peter Morici, a former chief economist at the U.S. International Trade Commission who has long advocated for an aggressive response to Chinese mercantilist economic behavior. “It’s very easy to trash someone with a tweet,” Morici said, referring to Trump’s frequent use of Twitter. “It’s much harder to stand up to someone your own size.”

Trump recently approved hefty tariffs on Chinese solar panels and South Korean washing machines, but Morici said those “rifle-shot” actions would not make a dent in the overall trade deficit.

The president is considering potentially more significant trade enforcement actions against Chinese steel and aluminum, and his administration is investigating allegations of Chinese theft of intellectual property that could ultimately lead to broad sanctions against China — actions that analysts fear could trigger a costly trade war.

“My concern would not be economic, it would be political,” said Mary Lovely, an economist and visiting fellow at the Peterson Institute for International Economics, referring to last year’s rise in the trade deficit. “I’m afraid this will be more fuel for an aggressive trade stance toward China, afraid that will lead to retaliation by China, and I think it will cause job destruction in the United States as well as in China.”

Lovely agrees that the rise of China as an economic force has cost the U.S. some jobs, but says growth in imports also has led to good-paying positions in transportation, wholesale trade and other services as well as cheaper prices for American consumers. And, like most mainstream economists, she considers the large U.S. trade deficit a long-term problem reflecting the imbalance between the nation’s investment and savings.

Economists also note that, in the global economy, the U.S. would have little to gain by competing with imported products that have relatively low value, such as toys and garments. But China’s share of higher-value goods that are traded has risen significantly over the years. More than one-third of the U.S. trade deficit with China in 2017 was in so-called advanced technology groups such as aerospace, electronics and biotechnology.

The Trump administration’s trade focus in its first year has been on NAFTA, a 24-year-old pact that the president has frequently threatened to withdraw from if the ongoing negotiations don’t go his way — a threat that he repeated Monday in a discursive speech in Cincinnati.

Tuesday’s report showed the U.S. trade deficit in goods with Mexico rose to $71 billion from $64 billion in 2016, the second largest after China. The United States also has similarly big deficits with Japan and Germany, although they changed little last year.

The goods deficit with Canada, the other NAFTA partner, increased to $17.6 billion in 2017 from $11 billion the prior year.

“It’s not surprising that the deficit is up because in Year One, there has been a wide gulf between Trump’s fiery trade rhetoric and action,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. “So the same failed trade policy Trump attacked as a candidate is still in place, outsourcing continues and promised actions remains undone.”

Staff Writer Jim Puzzanghera in Washington contributed to this report.

don.lee@latimes.com

Follow me at @dleelatimes

UPDATES:

2:35 p.m.: This article was updated with additional reaction from economists.

This article was originally published at 10:25 a.m.