US Trade Deficit Reaches Record High
Contrary to President Trump’s initial promise to reduce the gap between US imports and exports, the US is currently experiencing one of the highest levels of trade deficit in history at a staggering difference of $891.3 billion. President Trump’s policies directed at boosting exports and setting tariffs to protect domestic producers did little to close the negative trade gap. Economists have suggested that the appreciation of the US dollar combined with President Trump’s trade war with China has contributed to the deficit.
Although appreciation of the dollar has made the purchase of American goods and services less lucrative for foreigners, but increasingly attractive for Americans to purchase foreign-made goods, President Trump’s $1.5 trillion tax cut has led to higher deficits and interest rates. The administration’s proposed tax cut has primarily been funded by government borrowing has led to a government budget deficit which in turn affected the values of the dollar.
Reed College economist Kimberly Clausing shares his view “ All countries run trade deficits whenever they consume more than they produce...And when we borrow to finance tax cuts, like we did with the Tax and Jobs Act, we make these imbalances worse.”
Higher deficits have lead to higher interest rates, which means that investment activity will increase as people will be tempted to buy and hold bonds and other assets for an extended amount of time. Analysts claim that a reduction in national savings has occurred, confirming the fact that an increase in consumption and decrease in public savings led to the trade deficit the US is experiencing today.
Interestingly, despite President Trump’s implementation of tariffs against Chinese goods, the US trade deficit with China, in particular, is quite high. President Trump’s steadfast belief that China has exploited the US economically for a long time compelled him to implement tariffs against Chinese steel and other products, which has slowed down the Chinese economy and making it more difficult for China to purchase American goods. Such a phenomenon plummeted the number of American exports to the Asian economy. Jim O’Sullivan of High-Frequency Economics stated,“The deficit fell more than expected, consistent with some of the earlier rise being due to accelerated imports ahead of threatened tariffs.”
In other words, the tariffs are doing little to close the trade deficit, a promise President Trump initially made. “ Overall imports from China are holding up relatively well because of front-loading of orders for goods on the US $200 billion list and strong overall import demand.”
Analysts confirm that despite the tariffs, the demand for imported goods among the American consumers, stemming from the appreciation of the dollar, and lack of demand for American products among Chinese consumers paved the way for the extreme trade deficit.
The President views the trade deficit as a positive indication of a strengthening American economy. Although many refuse to embrace his view, the President’s views on the trade deficit do find support from certain economists in the country. “ The stronger trade deficit in the short run is telling you we’re importing more, so it’s not a particularly alarming development.” states Harvard University economist Lawrence H Summers.