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Trump's trade deficit 'win' has plenty of caveats

Behind the deficit narrowing is a fall in imports rather than a rise in exports - often a sign of weaker US demand

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The import contraction in the fourth quarter of 2019 appeared to be the largest seen since the 2007-2009 recession, which marked the last time the US saw a significant contraction in the trade deficit, according to Greg Daco, chief US economist for Oxford Economics.

Washington

NEW data shows President Donald Trump may be poised to deliver on one of his biggest economic promises - reducing the annual US trade deficit with China and the world.

Scratch the surface, though, and that accomplishment comes with plenty of caveats attached and even what some economists see as worrying signs for the US economy.

November trade data released Tuesday showed that the US goods and services deficit decreased by 0.7 per cent or US$3.9 billion in the first 11 months of 2019 from the same period a year earlier. That puts the annual deficit on track to fall for the first time since Mr Trump took office, promising to rebalance America's economic relationship with the world.

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It also, according to the administration, illustrates that despite the continuing doubts of many mainstream economists, Mr Trump's trade policies and his tariffs are contributing to a steady narrowing of the deficit that ought to be causing forecasters to upgrade their expectations for economic growth this year.

"Clearly, the Trump tariffs are working," said White House adviser Peter Navarro. A "Phase One" deal with China - scheduled to be signed in Washington on Jan 15 - should help as well, he said. Most of the tariffs now in place on some US$360 billion in imports from China are due to remain despite the deal, which means a drop in Chinese imports should continue. Beijing has also agreed to purchase an additional US$200 billion in US exports.

"We should see continued improvement in the China numbers as tariffs remain largely in place while purchases should increase significantly across our agricultural, energy, manufacturing and services sectors," Mr Navarro said.

The US tariffs so far have clearly had an effect on trade with the world's second-biggest economy. Imports from China continued a steep drop in November, declining for the sixth straight month and reaching the lowest since March 2013.

But the numbers released Tuesday also point to stark realities facing the US economy. The biggest contributor to the drop in the deficit from January through November was the continuing boom in shale oil. In nominal terms, the US's petroleum-trade shortfall with the world fell to US$13.1 billion in the first 11 months of 2019, more than US$35 billion less than it was in the same period of 2018. When it comes to the rest of the US economy - including a manufacturing sector Mr Trump has promised a revival of - the trade picture looks very different. The non-petroleum deficit grew almost US$20 billion to US$766.2 billion in the first 11 months of 2019, putting it on track to beat 2018's full-year record deficit of US$824.8 billion.

The other major factor driving the narrowing of the US trade deficit was a decrease in imports rather than an increase in exports. That is often a sign of weaker demand for the US rather than an economy poised to record another burst of growth.

It also creates a statistical quirk that has long been the source of a bitter debate between advocates of tariffs like Mr Navarro and other economists. Because of the way gross domestic product is calculated, a reduction in imports contributes to faster headline growth. Yet, most economists argue that is an accounting anomaly rather than a reason to cheer, especially if it is a sign of weakening demand rather than stronger domestic production.

The slowdown in imports has been accompanied by one in exports. It also has been exacerbated by companies drawing down on inventories built up earlier this year to try to get ahead of tariffs, according to Eliza Winger, who covers the US economy for Bloomberg Economics.

The import contraction in the fourth quarter of last year appeared to be the largest seen since the 2007-2009 recession, which marked the last time the US saw a significant contraction in the trade deficit, said Greg Daco, chief US economist for Oxford Economics. By his calculations, net exports would add 1.2 percentage points to GDP growth in the fourth quarter of 2019 - also the biggest such contribution seen since the crisis a decade ago. That it was likely to make up half the 2.4 per cent growth Mr Daco is forecasting for the quarter is not necessarily encouraging.

Mr Navarro insists that the tariffs have contributed to a re-shoring of manufacturing and broader investment in the US economy.

It's not clear from the data that has in fact happened, however. Last year saw a slump in business investment, with many companies blaming uncertainty related to Mr Trump's trade policies for holding off on big capital investments. Other data has pointed to a slowdown in US manufacturing last year.

It's also unclear how much of a political asset a small reduction in the trade deficit in 2019 is going to be in an election year. At more than US$562 billion, the US goods and services deficit in the first 11 months of last year was already more than US$60 billion higher than it was in all of 2016, the year Mr Trump was elected.

Over the course of Mr Trump's term, the deficit is clearly up, so in that sense, he has not succeeded, said Brad Setser, a senior fellow at the Council on Foreign Relations.

"What he has shown is if you put big enough tariffs on, that can change the bilateral balance of trade," Mr Setser said.

"What he hasn't shown is that his tariff-based strategy can generate a revival in US manufacturing." BLOOMBERG