Economists surveyed by Bloomberg expect a modest shrinkage in the deficit, from February’s number of $67.4 billion to $67.28 billion for April’s report. The last two international trade reports have shown that U.S. consumer spending remains strong. In February, the trade deficit gap widened more than expected, a clear indication that the U.S. economy continues in an upward slope. Tomorrow, the latest report will be released.
Here are five things to watch for in the report.
1. U.S. Deficit with China Continues to Shrink Down
In 2023, the deficit with China decreased by $102.9 billion to $279 billion. Economists expect the deficit with China to continue to narrow.
Ever since the early 2000s, the U.S. has depended heavily on China for imports to provide U.S. consumers with cheap products like electronics.
Chinese policies such as the “Open Door Policy,” improved the country’s participation in foreign trade by allowing their involvement in international economic organizations, like the World Trade Organization, which resulted in a 15% of its gross national product.
However, recently, the U.S. has decreased their reliability on Chinese imports due to trade disruptions after the pandemic, rising tensions between the U.S. and China, and tariffs put in place by the previous presidential administration and held by the current president.
As a result, the U.S. has turned to countries closer to home for imports. In 2023, the deficit with Mexico increased by $21.9 billion to $152.4 billion. As the U.S. turns to South America for imports, Brazil will also be a key player in the following months, said Stan Shipley, Senior Management Director of Evercore ISI.
2. Emerging Trade Partners
As a result, the U.S. has turned to countries closer to home for imports. In 2023, the deficit with Mexico increased by $21.9 billion to $152.4 billion. As the U.S. turns to South America for imports, Brazil will also be a key player in the following months, said Stan Shipley, Senior Management Director of Evercore ISI.
Mexico has an advantage over the other countries in the Western hemisphere. As a part of the North American Free Trade Agreement, now known as the U.S.-Mexico-Canada Agreement, companies are permitted to ship eligible goods to customers duty free.
Rising trading relations between the U.S. and Mexico have been in effect since 2018 when Mexico was the U.S.’ third-largest trading partner, after China and Canada. Additionally, according to the International Trade Administration, 27 U.S. states heavily rely on Mexico as their first or second-largest export destination.
3. Canada and the Automotive Industry
For January 2023, U.S. exports of automotive vehicles, parts, and engines increased $1.4 billion. U.S. imports also increased by $2 billion. January imports of automotive vehicles, parts, and engines were the highest on record.
Canada is one of the main producers of automobile parts that get imported into the U.S. The deficit with Canada widened in the fourth quarter. Exports increased by $2.8 billion to $110.4 billion. Most importantly, imports from Canada increased by $7.3 billion to $125.2 billion.
During the pandemic, car production was stagnant. However, car production in the U.S. is expected to keep up with demand as the U.S. economy recovers. Government incentives like the clean vehicle tax credit when purchasing electric vehicles will also have a modest influence on demand.
4. Overseas Travel
Americans traveling overseas continue to rise. For January, travel increased by $0.1 billion, which economists overlooked in their forecast for January’s report.
Traveling shows no signs of slowing down in the warmer months ahead as airfare costs remain stable, U.S. unemployment rates continue to remain down, and the overall health of the U.S. economy remains positive in comparison to European and East Asian countries.
5. Best and worst-case scenario
A deficit between $65 billion and $68 billion would be considered neutral by economists. Worst-case scenario, a deficit above $68 billion. Best-case scenario, economists agree to a deficit below $65 billion.
