The Anatomy of the U.S. Balance of Trade

Already during the election campaign Donald Trump had announced protectionist measures to reduce the high trade deficit of the U.S. Since March 2018 at the latest, this announcement has taken on ever more concrete form. The trade sanctions were initially mainly directed against China. But the European Union (EU) will not be spared either. The main reason for this are the bilateral trade deficits of the U.S. with these two economic areas.

U.S. international trade in goods and services

The following data on the U.S. trade balance (exports and imports of goods and services) are taken from the Bureau of Economic Analysis statistics (last update: 6 June 2018).

First, official U.S. data show that the U.S. has a deficit in trade in goods, while it has a surplus in trade in services with the rest of the world. On balance, the deficit of trade in goods predominates (see figure 1). The trade surplus in services shows that the U.S. economy has significant competitive advantages over the rest of the world in this sector.

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U.S. international trade with selected areas

Looking at the 2017 figures, the U.S. has by far the largest bilateral trade deficit with China (see Figure 2). With a relatively large gap, the entire European Union follows in second place and Mexico in third.

A look at the development of bilateral trade deficits illustrates that the deficit with the Chinese economy has widened considerably since 1999 (previous data not available). Between 1999 and 2017, the U.S. trade deficit with China increased fivefold. As early as 1999, China already was the country with the largest American trade deficit at 67.4 billion dollars. The U.S. deficit with Mexico and the European Union only increased by a factor of 3.5, and the deficit with Japan reached the same level as in 1999 (see Fig. 3).

Résumé

These few data points illustrate why the United States’ protectionist trade policy is first and foremost directed against China and then against the European Union. With a bilateral trade surplus of almost 67 billion dollars, Germany is also a target of this policy. Both theoretical and historical considerations show that punitive tariffs are seriously damaging the U.S. and are therefore not appropriate means. Nevertheless, it remains to be feared that U.S. trade policy will continue on this course in order to reduce the largest bilateral trade deficits.

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