US: Trade balance more apt to deteriorate than improve – BMO CM

Michael Gregory, Deputy Chief Economist at BMO Capital Markets, notes that in 2016, U.S. international trade in goods and services resulted in a $502 bln deficit, slightly higher than 2015’s shortfall (by only $1.9 bln) but still well short of 2006’s record $762 bln deficit.

Key Quotes

“However, the latter comparison, representing a 34% net improvement over the decade, is less impressive when one accounts for America’s growing trade surplus in services. It came in at $248 bln in 2016, a threefold increase from a decade ago.”

“The trade deficit in goods alone was $750 bln in 2016, representing a modest 10% improvement from 2006’s record $837 bln shortfall. And, any improvement disappears when one further accounts for America’s shrinking petroleum trade deficit (owing to the shale oil boom). It came in at $57 bln in 2016, an 18-year low and down sharply from the record shortfall of $386 bln in 2008 (the latter was inflated by record-high crude oil prices). The remaining trade deficit in non-petroleum goods was $677 bln in 2016, the largest on record.”

“Although there are net gains from international trade, the benefits tend to be diffused while the costs or adjustments tend to be concentrated.”

“Despite accounting for less than 9% of the total trade deficit in goods, the Administration has become fixated on the $63 bln deficit with Mexico, which can be completely accounted for by the automotive sector (thus making autos the most likely sector for NAFTA alterations). But, there are other countries contributing significantly more than Mexico to America’s massive trade deficit.”

“In 2016, three countries—China, Japan and Germany—contributed more to the goods trade deficit than Mexico.”

“Administration has criticized all three nations for their “too-weak” exchange rates, but they have not faced the same wrath as Mexico. Moreover, compared to Mexico, these three trade imbalances are cast in an even more negative light when considering the relative value of two-way trade.”

“Looking ahead to 2017, the U.S. trade environment could change markedly, with NAFTA being renegotiated and the potential for export-helping/import-hurting corporate tax changes (the border adjustment tax). Apart from these policy changes, with U.S. domestic demand growth probably picking up (owing to some fiscal stimulus and deregulation), and the U.S. dollar likely appreciating (partly owing to Fed tightening), America’s trade balance is more apt to deteriorate than improve. How the Administration and Congress could react to a widening trade deficit remains a key source of uncertainty.”