Trump's tax cuts will widen the trade deficit and hurt GDP

Markets Reporter
Yahoo Finance

The U.S. trade deficit in June widened by $3.2 billion and Trump’s own policies could be to blame.

After narrowing for three straight months, the U.S. trade balance with the rest of the world expanded in June to $46.3 billion as exports slowed. Exports rose sharply in prior months as the potential impacts from tariffs imposed by the Trump administration were front-run.

Economists at Barclays see Friday’s report as a harbinger of things to come, as the tax cuts boosting the U.S. economy will continue to grow imports while exports growth is likely to slow as firms deal with the impact of tariffs. Imports subtract from the GDP calculation while exports add to GDP growth.

“The widening in the trade deficit in June, after three consecutive months of narrowing, suggests that some of the transitory factors that drove those trends are starting to fade,” Barclays said in a note to clients on Friday.

“We expect the trade deficit to continue to widen, as a fiscal-stimulus led boost to demand leads to higher imports. As a result, trade is likely to subtract from GDP growth in the coming quarters, reversing the significant positive contribution recorded in Q2.”

And so as Yahoo Finance has written before, tax cuts could end up working against Trump’s efforts to bring down the U.S. trade deficit, which in 2017 totaled $570 billion.

Trade actions could also limit GDP growth in the quarters ahead alongside this tax cut boost.

In the second quarter, the U.S. economy grew at an annualized rate of 4.1%, the fastest pace of growth since 2014. This number got a positive boost from trade, with the surge in exports during the quarter adding 1% to growth.

“Much of the rise in exports was driven by Chinese imports of soybeans, which we believe reflects a reaction to potential imposition of tariffs,” Barclays said last week in response to the GDP number. “Hence, we do not expect the trade deficit to narrow further in Q3 and, instead, look for it to begin to widen.”

On Friday, Trump’s chief economic advisor Larry Kudlow told Bloomberg TV that the administration will keep pressing China for trade reform after China on Friday announced a list of $60 billion in U.S. goods that will be impacted by a new tariff. This action isn’t likely to help exports that were already set to decline in the current quarter.

And while the balance of trade’s negative impact on GDP is an accounting entry as much as it reflects an economy that is actually softer, a centerpiece of Trump’s economic policy and the main impetus for his trade actions is to get this number down.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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