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US trade deficit to widen, trade war or no trade war: S&P Global Ratings

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US trade deficit to widen, trade war or no trade war: S&P Global Ratings

President Donald Trump's threatened trade war with China may be on hold but any plans to use protectionism to reduce the trade deficit are doomed to fail anyway, as tax cuts and government spending fuel demand for foreign goods, said S&P Global Ratings' chief U.S. economist.

The U.S. and China have reached what U.S. Treasury Secretary Steven Mnuchin called a "framework" deal, under which Beijing would boost purchases of U.S. goods and Washington will stand down from threats to impose additional tariffs on up to $150 billion in Chinese goods. But whatever the outcome of the talks, fiscal expansion at a time of low unemployment will boost the appetite for consumption of American households and businesses just as low productivity rates steers them towards foreign imports, said Beth Ann Bovino.

"The Administration talks about reducing the bilateral trade deficit between the U.S. and China but there is a much bigger picture here: the U.S. trade deficit would just go somewhere else. The U.S. economy is doing rather well, we have more money to spend so we will spend it on cheaper products from abroad," she said in an interview.

The deficit in the U.S. current account is predicted to be $700 billion by 2020, up from just $465 billion last year, according to a May 18 report by Bovino and Satyam Panday. The rise in the shortfall in the broader measure of trade will be partly due to growth in the government's fiscal deficit, as this is unlikely to be countered by any corresponding rise in household savings or fall in private investment, the report said.

The Administration's tax reform, along with higher government spending this year and next following the 2018 bi-partisan budget agreement, is set to widen the fiscal deficit to $991 billion in 2020. This is up from $666 billion last year and more than double the $439 billion of its recent low in 2015.

The trade dispute between the U.S and China has been overly focused on the deficit in goods anyway, Bovino said.

"The big issue with China is not goods, it's services. The U.S. actually has a surplus in trade in services with China but it wants China to be more open, it wants better access to China's markets on fairer terms and it wants better protection for its intellectual property. That would be a real game changer. If these issues are not addressed then they will come back again further down the line," she said.

In addition to driving demand for foreign products, tax reforms are likely to provide a short-term boost of 20 basis points of GDP to the economy this year and the same next year, Bovino said, adding that she was less optimistic in the long run.

"Will this fiscal change really ignite the production beast? We are more skeptical. We will probably see a number of benefits go to shareholders in terms of share buybacks and dividend increases. Apple's share buyback has set the stage here, but the idea of the economy growing 3% annually ad infinitum, as some have suggested, does not seem likely," she said.

She predicts U.S. growth this year will be 2.9% before falling to 2.6% next year and reaching 1.8% in 2020, or "even lower," as demographic and technological changes complicate life for the country's workers.

"Prime age men aged 25-54 are quitting the workforce the percentage of such men in the workforce is down 7% since 1980 and now we are seeing a slowdown in women staying in the workforce, too. To an extent, we can blame it on robots, on automation," said Bovino.

"Trade is not the culprit for job losses in the U.S. economy that is mainly down to technology changes and the skills gap. Technological change is inevitable, but progress is optional and we haven't seen enough progress in dealing with that change."