The U.S. trade deficit widened in December for the second straight month as domestic demand for imported goods ended the year on a strong note.
The gap between imports and exports increased by 1.8% to $80.7 billion in December, slightly lower than the all-time high of $80.8 billion in September, according to Commerce Department data released on Tuesday.
Such an increase in the trade deficit continued to highlight the strong recovery of the U.S. economy from the pandemic, outpacing most countries.
Most notably, the economic slowdown in China contributed another $6 billion to the overall deficit in December, pushing up the bilateral deficit between the United States and China to $34.1 billion.
For all of last year, the annual trade deficit rose to a record $859.1 billion from $676.7 billion in 2020.
Multiple rounds of fiscal stimuli and trillions of dollars in excess savings gave Americans the cash to spend heavily on goods—which often run a deficit—while the pandemic continued to put pressure on trade services—which often help to offset such a deficit.
The trade deficit this year will be harder to predict as several offsetting factors play out. With fiscal stimulus from the pandemic fading and multiple rate hikes coming, spending demand will slow significantly.
But a stronger dollar because of interest rate increases will make imported goods cheaper relative to domestic goods, continuing to tip the trade balance toward a larger deficit.
And eventually the global economic recovery will gain momentum, adding more demand for U.S. goods and services and helping to offset some of that increase in the deficit.
The takeaway
The recent news about the Biden administration’s new engagement on trade policies toward the Asia-Pacific region to counter China’s influence reaffirms our forecast that trade policies will be one of the government’s main focuses this year.
Also, we expect that the shift toward more domestic production of important products like semiconductors because of supply chain-induced shortages will play an important role in shaping the U.S. trade balance.
