US trade deficit rises to nine-year high on robust imports

Imports, which subtract from gross domestic product, could get a further boost from a US$1.5 trillion tax cut package that became effective in January. PHOTO: GETTY IMAGES NORTH AMERICA

WASHINGTON (Reuters) - The US trade deficit widened more than expected in December to its highest level since 2008, as robust domestic demand pushed imports to a record high, potentially putting pressure on the Trump administration as it renegotiates trade deals.

The import-driven surge in the trade gap reported by the Commerce Department on Tuesday (Feb 6) also suggests a 3 per cent annual economic growth may be hard to achieve. Imports, which subtract from gross domestic product, could get a further boost from a US$1.5 trillion tax cut package that became effective in January.

The fiscal stimulus comes when the economy is almost at full employment, which means the resulting increase in demand will likely be satisfied with imports.

"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," said John Ryding, chief economist at RDQ Economics in New York.

The trade deficit increased 5.3 per cent to US$53.1 billion, the highest level since October 2008. Economists polled by Reuters had forecast the trade gap widening to US$52.0 billion in December. Part of the rise in the trade gap reflected higher commodity price increases.

The deficit surged 12.1 per cent to US$566.0 billion in 2017, the highest since 2008. That represented 2.9 per cent of GDP, up from 2.7 per cent in 2016.

The politically sensitive US-China trade deficit increased 8.1 per cent to a record US$375.2 billion last year.

President Donald Trump has vowed to shrink the trade gap through his "America First" trade policies, which aim to shut out more unfairly traded imports and renegotiate past US free trade agreements.

Trump has repeatedly threatened to terminate the North American Free Trade Agreement unless the 1994 pact linking Canada, Mexico and the United States can be made more favourable to Washington. And his administration has launched an investigation into China's intellectual property practices that could lead to major new trade sanctions on Beijing.

"The terms of trade are not completely unfair," said Chris Rupkey, chief economist at MUFG in New York. "Don't forget it is American companies assembling goods outside the country and then bringing them back in which is the problem with the trade imbalance in goods."

The surge in the December trade deficit was flagged by an advanced goods trade deficit report published in late January. When adjusted for inflation, the trade deficit increased to US$68.4 billion from US$66.5 billion in November.

The jump in the so-called real trade deficit at the end of the year puts trade on course to be a drag on GDP in the first quarter. Trade subtracted 1.13 percentage point from economic growth in the final three months of 2017.

The economy grew at a 2.6 per cent annualised rate during that period, helping to lift growth in 2017 to 2.3 per cent from 1.5 per cent in 2016.

Goods imports increased 2.9 per cent to a record US$210.8 billion in December. Imports of food, capital and consumer goods were the highest on record in December.

Consumer goods imports were buoyed by a US$1.8 billion increase in imports of pharmaceutical preparations. Imports of cellphones and other household goods rose by US$1.7 billion, while motor vehicle imports increased by US$1.1 billion.

Imports are being driven by robust domestic demand, which grew at its quickest pace in more than three years in the fourth quarter. The country's import bill in December was also pushed up by more expensive crude oil, which averaged US$52.10 per barrel, the highest since July 2015.

Imports from China fell 7.6 per cent. There were also declines in goods imported from Canada and Mexico, the United States' major trading partners.

Exports of goods increased 2.5 per cent to US$137.5 billion in December, the highest since October 2014.

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