China Trade Deficits Widening But U.S. Economy Improves in Q3

The Commerce Department announced a 3% GDP growth for Q2 last month, with trade accounting for two-tenths of a percentage point. 

The trade deficit increased by 0.3% in July to $43.7 billion. This is less than the $44.6 billion economists had predicted, and economists are hoping trade will contribute to economic growth in Q3. 

More data from July:

• Crude oil exports hit a 3-year high
• Exports of civilian aircraft increased by $1.1 billion
• Imports of meat and veggies reached an all-time high of $11.7 billion

Overall, exports of goods and services dropped 0.3% to $194.4 billion and imports of goods and services dropped 0.2% to $238.1 billion. 

This was all good news for Q3 until Hurricane Harvey smashed into Texas, and economists are now saying the hurricane’s aftermath could push the trade deficit up in September. 

“The US economy carried a little more momentum than originally thought,” says BMO Capital Markets economist Jennifer Lee. “However, some of that momentum will be blunted by, for starters, Hurricane Harvey.”

Despite the small increase in July, the deficit is still running 10% higher when compared to last year. A larger deficit subtracts from gross domestic product (GDP), which is considered the official “scorecard” of the economy.  

Foreign Deficits 

The trade deficit with China hit an 11-month high in July ($33.6 billion), giving President Trump more fuel for his argument that the ongoing deficit has destroyed factory jobs in the US and stunted our economic growth.  

Exports to China increased by 3.5% in July and imports increased by 3.1%.

Exports to the EU decreased by nearly 10% in July and imports dropped by 3.7%. The trade deficit with the EU climbed 7.9% to reach an 8-month high of $13.5 billion.

The deficit with Germany remained unchanged at $5.5 billion. 

The trade gap with Mexico dropped from $6 billion to $4.9 billion. 

August 

The US services sector, which represents more than two-thirds of our economic activity, showed strong gains in employment and new orders during the month of August. The government claims we created 156,000 new jobs in August, with a measure of services sector employment jumping 2.6 points. 

The Institute for Supply Management (ISM) reports that its non-manufacturing activity index rose 1.4 points in August, recovering from an 11-month low in July. 

Trade Deals 

The Trump Administration is seeking to curtail longstanding deficits by renegotiating trade deals. Trump has already promised to renegotiate NAFTA, a trade deal with Canada and Mexico. More recently, he has threatened to pull out of a free trade deal with South Korea. 

“When you negotiate with countries, keep in mind you are really going up against some of the biggest corporations in America who moved their operations overseas years ago,” explains MUFG economist Chris Rupkey. “This deficit concern is somewhat misguided as it is largely a trade war with ourselves. These jobs are not coming back to America’s heartland.” 

Rising consumer spending and increased business investment are drawing in more imports. In other words, our economy is improving so we are buying more stuff. This is a good sign from an economic standpoint, but we need to get our trade deficit down and increase our exports.

A large trade deficit tends to slow economic growth, because Americans are purchasing more goods from overseas than from the US. A large deficit is also bad because it means other countries own a lot of America. 

This is a difficult problem to solve considering the main reasons people buy foreign-made products: 1) Our economy is stronger than others and 2) The goods people need are no longer made in the US.

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