U.S. trade deficit soared to a record last year

The U.S. trade deficit in goods soared to record levels in 2021, topping $1 trillion as Americans continued to spend heavily on computers, toys, bicycles, clothing, pharmaceuticals and other goods made in foreign factories during the pandemic.

The overall trade deficit in both goods and services also hit an annual record, rising 27% as the country’s imports far outpaced its exports, according to data released by the Commerce Department on Tuesday.

The widening deficit — which climbed to $859.1 billion from $678.7 billion the previous year — was a reflection of a highly unusual pandemic economy.

Americans, sheltering at home from the coronavirus and many with savings swelled by government relief packages, slashed their spending on travel, restaurants and movies and splurged on furniture, electronics, food and other goods instead.

The trade deficit numbers are also the latest sign of how dependent the United States remains on other countries, particularly China, for the things that consumers want to buy.

While both President Joe Biden and former President Donald Trump have talked about reviving U.S. manufacturing, the United States continues to be deeply reliant on factories in China and other low-cost countries to produce a vast array of consumer goods.

Imports surged by $576.5 billion, or 20.5%, rising sharply from a slump at the onset of the pandemic, as both the quantity and the price of the foreign products that Americans purchased increased. Businesses spent heavily on equipment and machinery, and the rising price of energy also pushed up the cost of total imports.

Exports grew 18.5%, or by $394.1 billion. Demand for foreign goods was so strong that it snarled global supply chains and clogged U.S. ports, in some cases making it difficult for exporters to get their products out of the country.

The slowdown in demand during the pandemic for services, usually a strength for the U.S. economy, also pushed up the trade deficit, as foreigners drastically reduced their spending on tourism and education in the United States. The United States typically records a large trade surplus in services, which is subtracted from the overall deficit. Last year, the services surplus fell 5.6% to $231.5 billion.

In December, goods and services deficit rose 1.8% to $80.7 billion, just shy of a monthly record set in September.

The data also revealed the shortcomings of a trade deal that Trump signed with China in 2020. The agreement was designed to lower the U.S. trade deficit with China, which Trump viewed as a sign of America’s failing trade policy, and to boost purchases of American farm goods before the 2020 election.

China committed to buying an additional $200 billion worth of American goods and services above a 2017 baseline by the end of 2021. But those purchases did not materialize. In fact, data released Tuesday showed that China bought only 57% of the American exports it had committed to purchase under the agreement, according to tracking by Chad Bown, a senior fellow at the Peterson Institute for International Economics.

That was not even enough to reach the import levels from before the trade war, Bown said. In other words, China actually bought none of the additional $200 billion of exports that the trade deal had promised, he said.

“The data released today confirms that China has fallen well short of the purchase commitments they made under the Phase 1 agreement,” Adam Hodge, assistant U.S. Trade Representative for media and public affairs, said in a statement. “We have engaged the PRC on its shortfalls for months, but have not seen real signs towards making good on the purchase commitments and our patience is wearing thin.”

He added that the trade deal Trump signed in 2020 “did not address the core problems” with China’s state-led economy, and that the United States would continue its “efforts to shape the environment around China.” That included “building resilience and competitiveness at home, diversifying markets, limiting the impact of Beijing’s harmful practices, working with allies and partners, and using the full range of tools we have to defend American economic interests,” he said.

The Biden administration has been carrying out negotiations with Chinese officials about the trade deal and said that it intends to hold China to its commitments. But it has not yet clarified what action it will take in response.

The trade agreement did include an enforcement mechanism, in case one side failed to follow through on meeting its commitments. In that scenario, the trade deal calls for both governments to carry out talks; if those talks are unsuccessful, tariffs can be imposed.

But many American companies have complained that tariffs on Chinese products are already high. And in conversations with the Biden administration, Chinese leaders have cited a clause in the trade deal that calls for consultations between the governments “in the event that a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations.”

U.S. goods exports to China did grow substantially in 2021 from the previous year, rising 21.4% to $151.1 billion in 2021, including a record volume of agricultural goods. But American demand for imports from China also surged, and the U.S. deficit with China widened 14.5% from the previous year to reach $355.3 billion.

Trump’s defenders have said that the trade deficit with China had been falling until the pandemic hit. But Bown said that while the China trade deal might have succeeded in changing the terms of trade between the two countries, that had little effect on the overall U.S. trade deficit, which is driven by bigger factors like government spending and economic growth.

The China deal showed “that sort of approach isn’t effective at tackling” the overall trade deficit, “even if you think that’s an important policy issue to tackle,” Bown said.

Unlike Trump, Biden has made no concrete promises to lower the trade deficit. But he has pledged to spur a revival in American manufacturing and reduce the country’s dependence on China.

To accomplish this, the Biden administration has thrown its weight behind a massive legislative package that would pour nearly $300 billion into research and development and manufacturing, including major investments in the chips sector.

Economists say such investments could improve the competitiveness of the U.S. economy, expanding jobs and boosting exports. But such a transformation would happen over the course of years, and the legislation would probably do little in the short term to lessen American reliance on imports.

The ballooning trade deficit subtracted more than a percentage point from economic growth figures last year, more than it has in decades. Economists argue that the imbalances reflected in a large trade deficit can be related to a variety of economic issues, including fewer manufacturing jobs, unsustainable debt loads and financial bubbles.

“It’s devastating,” said Robert E. Scott, the director of trade and manufacturing policy research at the left-leaning Economic Policy Institute, which has called for more dramatic action to reduce the trade deficit, like realigning the value of the dollar. He added that the trade deficit was “draining jobs away from the recovery.”

“All that spending that’s falling on imports is creating jobs elsewhere and not in the U.S.,” he said.

However, there is debate about just how alarming the trade deficit figures should be.

Many mainstream economists say that trade deficits can rise for reasons that are either positive or negative. Those reasons are usually more related to economic growth rates, government spending and the value of the U.S. currency, they argue, than they are to trade policy.

Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said the ballooning trade deficit last year mostly reflected the country’s continued strong economic growth through the pandemic, which enabled Americans who were homebound to buy the electronics, imported pharmaceuticals and office supplies they wanted.

Lovely said that the relief packages offered by the Trump and Biden administrations helped keep Americans’ household balance sheets fairly healthy through the pandemic, and Americans responded by keeping their spending robust.

And even with many pandemic-related disruptions, the global supply chain delivered record volumes of office supplies, electronics, imported pharmaceuticals and personal protective gear last year, she said.

“In a lot of ways, this is a happy story,” she said.

“People worry that we are accumulating debt with the rest of the world, and that’s always a concern,” Lovely added. “But there hasn’t been any sign that the U.S. isn’t able to afford it.”