The United States’ international trade deficit narrowed in January, as both imports and exports fell, and the spread of the coronavirus outbreak is likely to lead to a further slowdown.
The trade gap fell 6.7% in January to $45.3 billion from a revised December number of $48.6 billion. This was due in part to a declining trend in imports, which dropped 1.6%, in industrial supplies and materials and other goods.
Last year was the first time in six years that the U.S.’ annual trade deficit narrowed. The further narrowing of the trade balance in January caught economists by surprise as they expected the markets to normalize this year after dealing with a particularly difficult last year, which saw the effects of an ongoing trade war and the strike against General Motors Co.
Narrowing the trade deficit was a big component of President Donald Trump’s 2016 presidential campaign and it’s an even bigger issue as he attempts re-election. Trump signed a “phase one” trade agreement between the U.S. and China in mid-January that called on China to buy more U.S. cars and oil, which economists expected to return the markets back to normal. But the sudden outbreak of the coronavirus is causing delays in the agreement taking effect.
“The expectation was that with a lot of trade policy uncertainty behind us, we get more commitment to exports and imports,” said Scott J. Brown, chief economist at Raymond James & Associates Inc. “This coronavirus is likely to turn all that on its head.”
Economists don’t know how long the coronavirus outbreak will last and what the long-term effects will be on the economy. But they say the trade balance will likely shrink again as the year goes on and the outbreak of the coronavirus continues to spread, disrupting supply chains and trade flows.
In response to the coronavirus epidemic, the Organization for Economic Cooperation and Development this week slashed its central growth forecast for the global economy from 2.9% to 2.4%. This equates to roughly $400 billion of lost growth across the world.
A recent survey by Thomas, an industrial sourcing and marketing platform, on how the virus is affecting the U.S. manufacturing industry, showed that 60% of companies reported being impacted. The survey reflected feedback from over 750 manufacturing and industrial suppliers in North America and found that businesses are looking outside of China to continue their production. This could potentially have major implications on the value of Chinese currency in the future, as money moves out of the country once companies find new suppliers elsewhere.
“This is a black swan moment that nobody saw coming, no one predicted,” said Tony Uphoff, the president and CEO of Thomas, in regards to business changing the way they think about managing their supply chain.
Like many small business owners, when Tanaïs founded Hi Wildflower, a beauty and fragrance company, she turned to Chinese manufacturers to provide inexpensive, yet quality, components for her lipsticks, such as the tubes they come in, and oils for her perfumes. However, the recent shutdowns in Chinese manufacturing factories has forced her to halt production and sales on some of her products.
“The things that are going to go out of stock, are going to go out of stock for now,” Tanaïs said. With no idea how long the virus will cause disruptions in the production of her goods, Tanaïs is eyeing Taiwan and Europe as potential new suppliers.
Although the overarching effects of the coronavirus are still unclear, economist Troy Ludtka of Natixis North America LLC believes it will set off a “domino effect,” starting with companies looking elsewhere for suppliers, and resulting in incredible consequences for where trade deficits are coming from and where money is going in and out, which will drive the relative value of currencies, prompting major political implications.
January also saw a slight decrease in exports of capital goods, but an increase in the export of automobiles and parts offset the month’s numbers. The further weakening of the value of the dollar will likely lead to an increase in exports in upcoming months, since it makes U.S. products cheaper overseas. The weakening of the dollar is a result of a decline in demands as consumers avoid traveling and gathering in public spaces out of fear of the virus. The Federal Reserve already executed a 0.5 percentage point cut on interest rates last week, heightening fears of a possible recession, and are eyeing another cut that will bring U.S. rates between 0% to 0.25% percent.
As the coronavirus continues to spread and take effect, all eyes are on how it will impact markets in the coming months. Economists are watching the Retail Sales, Consumer Price Index and the Personal Income indicators to see if there will be a serious disruption in terms of where the U.S. economy stands in the upcoming months. Although it’s too early to tell, the potential is there for a serious, long-lasting disruption to global trade activity.