Several global economic factors explain the widening of the global trade 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.
The value of the Chinese yuan, which is determined partly by the market and partly by the government, weakened against the dollar last year and started rising again in the fall, as President Xi Jinping of China met Mr. Trump in Argentina in November 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.
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 helped boost growth last year.
Money from the tax cuts helped Americans buy more imported goods than ever before 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 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 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 to the same month a year ago.
As with the trade deficit, many economists are growing less alarmed by the budget deficit. However, Federal Reserve officials and some economists warn federal borrowing is on an unsustainable path and will ultimately hurt the American economy. 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.
