U.S. Trade Deficit Soars: I Think That Makes A U.S.-China Trade Deal More Likely

In December the U.S. trade deficit widened to $59.8 billion from a revised $50.3 billion in November. Economists surveyed by Briefing.com had projected a December deficit of $57.8 billion. The December deficit is the widest monthly deficit since October 2008 during the global financial crisis. The annual U.S. trade deficit grew to $621 billion in 2018 for a 10-year high. The annual deficit in goods and services grew by $68.8 billion or 12.5%.

The annual merchandise trade deficit with China climbed to a record $419 billion in 2018.

The numbers certainly increase the pressure on the Trump administration to do something dramatic.

In my opinion, the administration’s trade negotiators have two options.

One, they could use these numbers to dig in their heels and demand big structural changes in China’s economy. The argument would be that nothing but big changes–the end of China’s subsidies to national champions as part of the government’s industrial (and especially technology) policy and the end to non-tariff barriers that keep overseas companies out of China’s markets (and especially the market in financial services.) China remains strongly opposed to concessions of this kind, which threaten the grip of the Chinese Communist Party on the economy.  A U.S. insistence on these measures would be a defiant gesture by the administration on trade but would certainly risk the collapse of the talks.

Two, these numbers could strengthen the hand of trade pragmatists in the Trump administration to take the deal that seems to be on the table. China has offered to purchase enough additional exports from the United States to eliminate the U.S. trade deficit with China within the next five to six years. Combine that with some window dressing on other issues–a memorandum of understanding on intellectual property protection, for example–and the Trump administration could have a very splashy signed deal by the end of March that would let President Donald Trump claim that he had eliminated the U.S. trade deficit with China.

Both these alternates are possibilities. My read is that the administration will decide to take the money and go with Alternative Two. On paper it’s splashy. Easily portrayed as a big accomplishment. And easily explained.