- The US trade deficit blew out to record levels in 2020 due to the pandemic.
- But that should turn around in 2021, as the US starts exporting more goods.
- The will help boost the US economy and strenghten the US dollar.
- Neil Dutta is head of economics at Renaissance Macro Research.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit the Business section of Insider for more stories.
For years, the Trump administration drew attention to what the former president called the US’s “unacceptable” trading relationship with the rest of the world.
Ironically, by the time President Trump’s time in office was up, the real trade deficit widened to a record. The widening of the trade deficit was a meaningful drag on growth over the second half of 2020, a time when the broader economy was in recovery.
But this year, trade is likely to provide a lift to US growth, and the narrowing of the trade deficit may also push up the value of the US dollar against the currencies of its major trading partners.
Why the trade deficit grew in 2020
To understand why the trade deficit will narrow this year, let’s first look to why it widened so sharply in the first place.
Despite a pandemic, US consumption of goods was relatively buoyant. Indeed, real goods consumption is running about 1.0% above its pre-pandemic trend. This is remarkable given the scope of the job loss in the US and elevated levels of uncertainty in the economic outlook. Purchasing decisions behind big-ticket items tend to be hard to undo. Moreover, many big-ticket goods could be purchased without making physical trips to the store.
While the US is a relatively closed economy, goods represent the main source of imports. In 2020, goods accounted for 83% of US imports, broadly in-line with the average over the last three decades.
But while American households were buying goods from abroad, the same cannot be said of other countries buying our goods. About two-thirds of US exports are goods. These exports dropped more sharply during the depths of the pandemic and have recovered more slowly, leading to the wider overall trade deficit. But there is reason to expect goods exports to pick-up in the year ahead.
Why the trade deficit will shrink in 2021
Much of the trends that helped drive the record trade deficit in 2020 are about to see a turnaround, which in turn is good news for US economic growth.
Global manufacturing has picked up, and most of what is manufactured in the US is tradable goods. For example, the ISM new export orders index is consistent with solid growth in goods exports over the next few quarters. So American exports should pick up as well, helping narrow that side of the deficit.
In the year…
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