The Economy

Trade Gap Widens to Record $502B in 2016

The stronger dollar, larger federal budget deficits, and low national saving rates could force further widening in the trade deficit.
Matthew HellerFebruary 8, 2017
Trade Gap Widens to Record $502B in 2016

The U.S. trade deficit rose slightly in 2016 to the highest level in four years as exports fell faster than imports amid a weak global economy and stronger dollar.

The Commerce Department said on Tuesday the trade gap dropped 3.2% in December to $44.3 billion, ending two straight months of increases. But the deficit for the year as a whole rose 0.4% to $502.3 billion, the highest level since 2012.

Exports of goods and services fell $51.7 billion, or 2.3%, in 2016 while imports decreased $49.9 billion, or 1.8%.

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In December, exports hit their highest level in more than 1-1/2 years amid record shipments of technology products, but according to Reuters, “strengthening domestic demand points to further rises in imports, which could constrain economic growth.”

The stronger dollar — which makes U.S. exports more expensive to foreign buyers — larger federal budget deficits and low national saving rates compared with much of the rest of the world could also force trade deficits to widen.

The U.S. currency has appreciated by 2% since Donald Trump’s election to the presidency, according to Federal Reserve data. Moreover, as The Wall Street Journal reports, “the new president’s stated desire to cut taxes and increase government spending could expand the federal budget deficit, a phenomenon that in the past has been accompanied by a wider trade gap.”

“We may be now seeing a return of the ‘twin deficits’ that we saw in the 1980s and the 2000s,” said Harvard University economist Jeffrey Frankel, a former member of the White House Council of Economic Advisers under President Bill Clinton.

Trump also wants to renegotiate the North American Free Trade Agreement, but economists do not believe protectionist measures will eliminate the deficit.

“When an economy is at full employment, an acceleration in demand tends to be accompanied by a pickup in import growth and a wider trade deficit,” John Ryding, chief economist at RDQ Economics in New York, told Reuters. “The U.S. simply does not have enough spare labor and capacity at any exchange rate to close the deficit, which will likely widen in 2017 and 2018.”

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