WASHINGTON -- The overall U.S. trade deficit shrank last year for the first time in six years as the economy cooled, domestic oil production soared and President Donald Trump waged an aggressive global trade war to rewrite America's trading terms.
The trade deficit for both goods and services fell to $616.8 billion in 2019, down $10.9 billion from the previous year, according to data released Wednesday by the Commerce Department.
Both imports and exports fell as American factory activity slowed and businesses and consumers felt the impact of tariffs imposed on China, the European Union, Canada, Mexico and other nations. Total U.S. exports dropped $1.5 billion (0.1%) to roughly $2.5 trillion, while imports fell $12.5 billion (0.4%) to $3.1 trillion.
Soaring domestic oil production was a big factor in the shrinking trade deficit, cutting into imports of foreign crude oil by $30.3 billion last year. Exports of civilian aircraft also fell $12.6 billion last year, reflecting the fallout from the crashes of Boeing's 737 Max airplane.
But the most dramatic changes in global trade flows occurred with China, the target of Trump's biggest economic offensive.
The trade deficit in goods with China shrank $73.9 billion to $345.6 billion in 2019. It was the first drop on an annual basis since 2016, as both the United States and China placed tariffs on hundreds of billions of dollars of each other's products.
In particular, U.S. imports from China fell sharply in the final two months of the year, as companies worked to avoid tariffs that Trump has placed on $360 billion worth of Chinese goods and the potential that he could tax nearly everything from China.
Trump and his advisers have pointed to trends in trade flows as evidence that his trade policies are helping to revive factories and construction sites around the nation.
"This is a blue-collar boom," Trump said in the State of the Union address on Tuesday evening.
But economists have been skeptical, saying that the country's factory activity weakened last year, and that the trade flows largely reflect a cooling U.S. and global economy.
SHOPPING ELSEWHERE
Economists say the hefty tariffs Trump has placed on China have encouraged American consumers to purchase goods from other countries and have not led to a U.S. manufacturing renaissance.
"Tariffs to date have clearly had a significant impact on imports from China," said Brad Setser, a senior fellow at the Council on Foreign Relations. "They equally clearly have not led to a stronger U.S. manufacturing sector."
Rather than returning manufacturing to the United States, the clash with China has caused American companies and consumers to shift purchases to other countries such as Mexico, Vietnam and South Korea, said Mary Lovely, a senior fellow at the Peterson Institute for International Economics.
The goods trade gap with Mexico rose 26.2% last year to a record $101.8 billion.
The trade deficit in goods with Canada grew by $8 billion, while the gap with Taiwan increased by $7.8 billion.
"You're going to see this rearrangement of the deck chairs," Lovely said.
The goods deficit with the European Union also hit a record in 2019, $177.9 billion -- up 5.5% from 2018, presaging Trump's next conflict. In recent weeks, Trump has said that his attention was shifting to Europe now that he has signed trade deals with China, Japan, Canada and Mexico.
Trump has criticized Europe for selling more to the United States than it buys and has accused its central bank of pushing down the value of the euro to make it easier for European companies to compete against American rivals. His administration is already imposing tariffs on Europe over airplane subsidies, and is threatening further levies in response to its digital taxes and on its cars.
DIFFERING PERSPECTIVES
Trump has long pointed to the trade deficit -- the gap between what America exports and what it imports -- as proof that the United States is at a competitive disadvantage because of unfair practices by China and other countries.
Many economists argue that trade deficits are largely the result of a big economic reality that doesn't respond much to changes in trade policy: Americans spend more than they produce, and imports fill the gap.
In the president's view, American businesses would be making more at home and consumers would be buying more domestic goods if countries like China weren't subsidizing their industries and manipulating their currencies to make their products cheaper.
Some analysts agree with that perspective. Michael Stumo, chief executive of the Coalition for a Prosperous America, which has supported Trump's trade moves, said the shrinking trade deficit showed that American consumers were shifting to buying more U.S.-made products, and that Trump should make his China tariffs permanent.
"Rebuilding U.S. manufacturing is the single most important step Washington can take to increase prosperity for America's middle class," Stumo said.
But most economists argue that while a falling trade deficit can be a sign of a growing economy, the measure can fall for a variety of other reasons, many of them unrelated to trade and not all of them positive.
Setser said that a falling trade deficit can sometimes be a sign of the kind of manufacturing boom that the Trump administration has been trying to engineer. In that case, American factory production would be rising.
Instead, factory activity has been weak, and both U.S. imports and exports have contracted, he said. In addition, tariffs and trade uncertainty appear to have cut into business investment, slowing economic growth. When petroleum products are excluded, the U.S. trade deficit in goods actually rose compared with the year before.
APPLES AND ORANGES
Economists point to another major reason focusing on the trade deficit can be misleading: The gap with China is exaggerated because of how the data is calculated. U.S. trade data counts the entire value of a good as coming from the country it was assembled in.
China is still a global center for assembling products like smartphones and laptops, but many of the components and the technology that goes into these goods are made elsewhere.
Smartphones are one example. A touch screen might be made in Taiwan, or a microprocessor in South Korea. The chips may come from American companies such as Qualcomm or Texas Instruments, and the product may have been developed and marketed in the United States.
All of those companies and their employees will receive a share of the final profits. But if all of those components are assembled in China before being shipped to the United States, trade statistics will record the entire value of the phone as being generated in China.
Some analysts do see a victory for the United States in the falling trade deficit with China: those in Washington who see China as an increasing national security threat.
China's profits from what it sells to the United States and other nations helps fund its efforts to expand its influence around the globe, like its Belt and Road infrastructure building project, activities that do not benefit the United States, said Derek Scissors, a resident scholar at the American Enterprise Institute.
"I'd rather put the hard currency in the hands of the South Koreans, the Vietnamese. And normal economists just don't think that way," he said.
"Economists will say, 'Oh great, the president has had success on a meaningless indicator he made up for political reasons,'" Scissors added. "I agree with that. But I want to trade more with my friends" and less with dictators, he said.
Information for this article was contributed by Ana Swanson of The New York Times; and by Paul Wiseman of The Associated Press.
A Section on 02/06/2020