U.S. Trade Deficit Shrinks, but Not Because Factories Are Returning

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WASHINGTON — The overall United States trade deficit shrank last year for the first time in six years as the American economy cooled, domestic oil production soared and President 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 by the Commerce Department on Wednesday.

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 American exports dropped $1.5 billion to roughly $2.5 trillion, while imports fell $12.5 billion to $3.1 trillion.

Soaring domestic oil production was a major 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 deadly crashes of Boeing’s 737 Max airplane.

But the most dramatic changes in global trade flows occurred with China, the target of Mr. 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 others’ products.

In particular, American imports from China fell sharply in the final two months of the year, as companies worked to avoid tariffs that Mr. Trump has placed on $360 billion worth of Chinese goods and the potential that he could tax nearly everything from China.

Mr. 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,” Mr. Trump said in the State of the Union address on Tuesday evening.

But most economists have been skeptical, saying that the country’s factory activity weakened last year, and that the trade flows largely reflect a cooling American and global economy.

Economists say the hefty tariffs Mr. Trump has placed on China have encouraged American consumers to purchase goods from other countries and have not led to an American 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 bringing manufacturing back to the United States, the clash with China has caused American companies and consumers to shift purchases to other countries, like Mexico, Vietnam and South Korea, said Mary E. Lovely, a senior fellow at the Peterson Institute for International Economics.

Data released Wednesday morning showed the trade deficit in goods with Mexico increased $21.1 billion last year to a record $101.8 billion, as the United States brought in more goods from its southern neighbor. 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,” Ms. Lovely said.

The trade deficit in goods with the European Union also expanded to a record $177.9 billion in 2019, presaging Mr. Trump’s next conflict. In recent weeks, Mr. Trump has said that his attention was shifting to Europe now that he has signed trade deals with China, Japan, Canada and Mexico.

Mr. 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.

Many economists have predicted that Mr. Trump’s trade deal with China would give businesses more certainty about trading conditions and cause imports from China to rebound, at least in part, in the coming months.

But the spread of a deadly coronavirus has thrown those predictions into question. China has shuttered factories, canceled flights and placed entire cities on lockdown to stop the spread of the virus, weighing heavily on trade. And China may delay some of its planned purchases of American goods as a result.

Mr. Trump has long pointed to the United States trade deficit — the gap between what America exports and what it imports — as proof that America is at a competitive disadvantage because of unfair practices by China and other countries.

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, the chief executive of the Coalition for a Prosperous America, which has supported Mr. Trump’s trade moves, said the shrinking trade deficit showed that American consumers were shifting to buying more American-made products, and that Mr. 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,” Mr. Stumo said.

But most economists argue that the trade deficit is a poor metric for measuring the health of the economy or America’s trading relationships. 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.

Mr. 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, displacing foreign products from the American market and causing imports to fall and exports to rise.

But that is not the situation the United States finds itself in, he said. Instead, factory activity has been weak, and both American 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 United States trade deficit in goods actually rose compared with the year before.

Speaking at an event at George Washington University on Tuesday, Janet L. Yellen, the former Federal Reserve chair, said that the bilateral trade deficit between the United States and China was “not the proper focus.”

Ms. Yellen said that Mr. Trump and some of his advisers see the trade gap “as a symptom of relationships being unfair.” But for many economists, a country’s overall trade deficit with the rest of the world just means that country is spending more than the output it can produce itself, she said.

“Most economists think that a country’s savings and investment are decisions that aren’t affected by trade policy,” she said.

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. United States 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.

Take a smartphone, for example. A touch screen might be made in Taiwan, or a microprocessor in South Korea. The chips may come from American companies like 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.

Economists say this method of measurement may exaggerate the trade deficit with China, perhaps by as much as one-third.

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,’” Mr. Scissors added. “I agree with that. But I want to trade more with my friends” and less with dictators, he said.

Jeanna Smialek contributed reporting from Washington.

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