WASHINGTON — America’s trade deficit in goods with the rest of the world rose to its highest level in history last year as the United States imported a record number of products, including from China, widening the deficit to $891.3 billion and delivering a setback to President Trump’s goal of narrowing that gap.
The increase was driven by some factors outside Mr. Trump’s control, like a global economic slowdown and the relative strength of the United States dollar, both of which weakened overseas demand for American goods. But the widening gap was also exacerbated by Mr. Trump’s $1.5 trillion tax cut, which has been largely financed by government borrowing, and the trade war he escalated last year.
It is a case of textbook economics catching up with some of Mr. Trump’s unorthodox economic policies. Economists have long warned that Mr. Trump’s tax cuts would ultimately exacerbate a trade deficit he has vowed to reduce, as Americans, flush with extra cash, bought more imported goods.
His trade war with Beijing also widened the gap: Stiff tariffs on Chinese goods helped slow China’s economy, crimping American exports, which declined nearly 50 percent in December from the same month a year before.
“All countries run trade deficits whenever they consume more than they produce,” said Kimberly Clausing, an economist at Reed College in Oregon. “And when we borrow to finance tax cuts, like we did with the Tax Cuts and Jobs Act, we make these imbalances worse.”
The trade deficit is the difference between how much a country sells to its trading partners and how much it buys. It generally includes both goods and services, though Mr. Trump has focused almost exclusively on the deficit in goods. He has long boasted that his trade policies would reduce that gap, which he views as a measure of whether partners like China and the European Union are taking advantage of the United States, a diagnosis few economists share.
Instead, in a year in which Mr. Trump imposed tariffs on steel, aluminum, washing machines, solar panels and a variety of Chinese goods, the overall trade deficit grew 12.5 percent from 2017, or nearly $70 billion, to $621 billion, the Commerce Department said Wednesday. Although the United States recorded a trade surplus in services, the trade deficit in goods with the European Union and Mexico grew more than 10 percent as imports rose faster than exports.
In December, the overall deficit in goods and services, which includes everything from computers and washing machines to tourism and intellectual property, rose 19 percent from the previous month, to $59.8 billion. It was the highest monthly trade deficit since 2008, when the American economy was mired in recession.
Several global economic factors explain the widening of the deficit last year. China’s slowdown has reduced consumer appetite for American goods, as has slowing growth in Europe. The strength of the dollar in global currency markets has made it cheaper for American consumers to buy foreign-made goods, and more difficult for foreign customers to buy American-made ones.
That helped fuel a record number of Chinese goods imported into the United States. The trade gap in goods between the United States and China hit $419 billion in 2018, deepening a bilateral deficit that has been a particular source of anger for Mr. Trump.
While Mr. Trump sees the trade deficit as a sort of economic scorecard for which country is on top, most economists disagree with this perspective, viewing trade deficits not as a sign of economic strength or weakness, but as a function of macroeconomic factors like investment flows, fluctuations in the value of currency and relative growth rates.
And as the trade deficit widens, Mr. Trump’s focus on it has resulted in a particular irony: By his own metric, the president is failing to right America’s global trading relationships. Yet many of the president’s critics do not blame him for this, saying some fluctuations in the trade deficit are largely beyond his control.
“The stronger trade deficit in the short run is telling you we’re importing more, so it’s not a particular alarming development,” said Lawrence H. Summers, a Harvard economist who directed the National Economic Council under President Barack Obama. “The president notwithstanding, I’d rather live in a country that capital is trying to get into, rather than get out of. The reason we have a trade deficit is people are investing in America.”
Mr. Trump has aimed tariffs at China, Europe, Canada and Mexico to help reset the trade balance with other countries that he says engage in unfair practices to gain a competitive edge in global trade.
That is particularly true with China, which Mr. Trump and many business groups say tilts the balance of power by providing state subsidies, blocking foreign competition and engaging in other tactics. His top advisers are pressing Beijing to commit to a specific target for reducing the bilateral trade imbalance between the countries. While the Chinese have offered to make large purchases of American products, including soybeans and liquefied natural gas, they have resisted setting a specific dollar target for the trade balance, arguing that such a metric is largely beyond their control.
In a congressional hearing last week, Robert Lighthizer, Mr. Trump’s top trade negotiator, held up a chart that showed a steadily rising trade deficit with China. Also marked on the chart were various negotiations past administrations had held with China, which Mr. Lighthizer said had failed to stem the deficit’s rise. He called the deficit with China, along with China’s unfair trade practices, “major threats to our economy.”
The value of China’s currency, which is determined partly by the market and partly by the government, weakened against the dollar last year, blunting the effect of Mr. Trump’s tariffs by making Chinese goods even cheaper. The currency began rising again in the fall, as President Xi Jinping of China met Mr. Trump in Argentina late last year to begin hammering out a trade pact, said Brad Setser, a senior fellow for international economics at the Council on Foreign Relations.
“China certainly allowed the market to push the value of the yuan down against the dollar over the summer,” Mr. Setser said.
As part of the trade deal in the works, the United States has secured a commitment from Beijing not to artificially weaken its currency, according to administration officials.
The relative strength of the United States economy is also a large factor in the widening deficit, along with the $1.5 trillion tax cut Mr. Trump signed in 2017, which accelerated growth last year.
Money from the tax cuts helped Americans buy more imported goods than ever in 2018. And to finance the tax cuts, the government needed to borrow more dollars, some of which came from foreign investors. Foreigners primarily get those dollars by selling more goods and services to Americans, which will necessarily widen the trade gap, an effect that many economists predicted at the time Mr. Trump signed the tax cuts.
The tax cuts are also helping to swell the federal budget deficit, which Mr. Trump similarly pledged to reduce — and, in fact, eliminate — as a candidate. On Tuesday, Treasury Department figures showed the budget deficit widening, and it is on track to top $1 trillion this fiscal year. Revenue from personal and corporate income taxes was down by 9 percent in January, compared with the same month a year ago.
As with the trade deficit, many economists are growing less alarmed by the budget deficit than in previous years. However, Federal Reserve officials and some economists warn that federal borrowing is growing too quickly and will ultimately swamp the American economy, with the United States paying huge sums of interest on the debt, diverting funds from social safety net programs like Medicare and Social Security. The Fed chairman, Jerome H. Powell, warned lawmakers at a House hearing last week that the federal debt was on an “unsustainable” path.
Mr. Powell was asked during the hearing if he would also say that the trade deficit was unsustainable. “I don’t think I would say that,” he replied.