Record U.S. trade deficit in 2018 reflects failure of Trump’s trade policies

The U.S. Census Bureau reported that the U.S. goods trade deficit reached a record of $891.3 billion in 2018, an increase of $83.8 billion (10.4 percent). The broader goods and services deficit reached $621.0 billion in 2018, an increase of $68.8 billion (12.5 percent). The rapid growth of U.S. trade deficits reflect the failure of Trump administration trade policies, as well as the negative impacts of tax cuts and spending increases, which have sharply increased the federal budget deficit, and tightening of U.S. monetary policy, resulting in upward pressure on interest rates and the real value of the dollar.

The IMF predicts that the U.S. current account deficit—the broadest measure of U.S. trade in goods, services, and income—will nearly double between 2016 and 2022. Unless these trends are offset by a rapid decline in the value of the U.S. dollar, rapidly rising trade deficits could be devastating for U.S. manufacturing, likely giving rise to massive job loss on the scale experienced in the 2000–2007 period, when 3.5 million U.S. manufacturing jobs were lost.

The U.S. goods trade deficit with China reached a new record of $419.2 billion in 2018, up from $375.6 billion in 2017, an increase of $43.6 billion (11.6 percent). United States trade with China is dominated by the deficit in manufactured products. Although the United States has imposed tariffs of 10 to 25 percent on $250 billion in imports from China (about half of total U.S. imports from that country), China has played its ‘ace-in-the-hole’ by allowing it’s currency to fall by roughly 10 percent against the dollar. As a result, the U.S. trade deficit with China increased faster (11.6 percent) than the U.S. deficit with the world as a whole (10.4 percent). While the United States and China are poised to negotiate a deal to end their trade dispute, the proposed deal amounts “much ado about nothing much,” as Paul Krugman puts it. It will do little to reduce the massive imbalance in U.S.–China trade flows.

The vast bulk of the U.S. goods trade deficit in 2018 was explained by trade in non-petroleum products, which are dominated by manufactured goods. The trade deficit in non-petroleum products reached $825.4 billion in 2018, an increase of $91 billion (12.4 percent). The United States had a small trade surplus of 26.5 billion in agricultural products in 2018 (this sector is part of trade in non-petroleum products). The agricultural trade surplus declined by $2.4 billion in 2018 (8.3 percent), as a consequence of trade restraints in China and elsewhere, and the rising dollar. The United States had a trade surplus in services which increased from $255.2 billion in 2017 to $270.2 billion in 2018, an increase of $15.0 billion (5.9 percent). However, the growth in the services surplus was more than offset by the $83.8 billion increase in the goods trade deficit; thus the overall goods and services deficit increased by $68.8 billion (12.5 percent) in 2018.

The most important cause of large and growing U.S. trade deficits is persistent currency undervaluation by countries such as China, Japan, and Korea, which have run large, persistent trade surpluses, as well as large structural surpluses accumulated by the European Union, including especially Germany and the Netherlands. The real, trade-weighted value of the U.S. dollar increased 21.8 percent between December 2013 and December 2018, and including 6.7 percent in 2018 alone, as shown below. The Trump tax cuts will add more than $1 trillion to U.S. fiscal deficits over the next decade, putting upward pressure on interest rates and the U.S. dollar, as reflected in the chart, below. Absent aggressive efforts to reduce its value, the rising dollar will put continuing upward pressure on the trade deficit, and downward pressure on employment and output in U.S. manufacturing.

Figure A

Real U.S. trade-weighted exchange rate, December 2013–December 2018

date Rate
Dec-2013 84.7481
Jan-2014 85.5487
Feb-2014 85.6980
Mar-2014 85.6090
Apr-2014 85.1991
May-2014 84.8602
Jun-2014 84.9353
Jul-2014 84.7061
Aug-2014 85.3377
Sep-2014 86.4672
Oct-2014 87.4377
Nov-2014 88.7090
Dec-2014 90.4715
Jan-2015 92.0210
Feb-2015 93.1480
Mar-2015 94.8029
Apr-2015 93.8577
May-2015 93.2161
Jun-2015 93.9750
Jul-2015 95.5522
Aug-2015 97.1761
Sep-2015 97.6919
Oct-2015 96.7728
Nov-2015 98.2471
Dec-2015 99.0087
Jan-2016 101.2569
Feb-2016 99.9133
Mar-2016 97.8710
Apr-2016 96.5043
May-2016 97.5735
Jun-2016 97.9677
Jul-2016 98.4812
Aug-2016 97.7079
Sep-2016 98.4392
Oct-2016 99.3617
Nov-2016 101.7209
Dec-2016 103.3939
Jan-2017 103.2697
Feb-2017 101.8888
Mar-2017 101.1226
Apr-2017 100.2348
May-2017 99.6588
Jun-2017 98.2994
Jul-2017 96.8348
Aug-2017 95.8970
Sep-2017 95.2549
Oct-2017 96.8328
Nov-2017 97.0172
Dec-2017 96.7247
Jan-2018 94.9680
Feb-2018 95.1089
Mar-2018 95.3594
Apr-2018 95.4964
May-2018 98.0981
Jun-2018 99.5974
Jul-2018 99.9504
Aug-2018 101.0158
Sep-2018 101.2096
Oct-2018 101.9543
Nov-2018 103.1094
Dec-2018 103.2119


ChartData Download data

The data below can be saved or copied directly into Excel.

Source: Board of Governors of the Federal Reserve, “Price-Adjusted Broad Dollar Index—Monthly Index

Copy the code below to embed this chart on your website.