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Economic Forecasts

Widening Trade Gap Sparks White House Worry

Kiplinger's latest forecast on the direction of the trade deficit

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The U.S. shortfall on trade with the rest of the world will swell by about 4% this year, guaranteeing that persistent deficits will remain high on the Trump administration’s economic agenda. The U.S. registered back-to-back trade deficits just over $500 billion in 2015 and 2016. President Trump campaigned on pledges to bring back more industrial production to the U.S. and to curb any unfair practices by trade partners.

It’s an uphill battle to limit the deficit, partly because of the U.S. economy’s vigor. Steady but unspectacular GDP growth has helped fatten consumers’ pocketbooks by cutting unemployment to a point where rising incomes make costly imports easier to buy. The dollar’s value has eased by about 2% against other major currencies since the start of the year. But that follows a steep appreciation, topping 20% from mid-2014 through the end of last year, which effectively makes many imported goods relatively cheaper now than they were nearly three years ago.

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The trade deficit is up about 3% so far this year, compared with the opening two months of 2016. Trump is meeting with Chinese leaders, and trade will be a key topic, since the bilateral deficit with China is by far the largest with any country, and administration officials describe China as protectionist. The administration also wants to renegotiate an existing 23-year-old pact with neighbors Canada and Mexico — the North American Free Trade Agreement — notwithstanding that the two countries are top destinations for U.S. manufactured and agricultural exports.

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One positive sign: Overseas markets, notably in Europe, are doing better than expected. Eurozone economies continue to grow modestly while the process for Britain quitting the European Union is getting under way. That helped the United States sell more food products, consumer goods and oil during February. Imports were down slightly from January levels, largely due to fewer automobile and cell phone imports. The dip may have been affected by swings in Chinese activity around the lunar new year rather than by any real change in trade patterns, though, and imports will resume growing in coming months.

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Sources Department of Commerce, Trade Data