Published: Mon, August 06, 2018
Business | By Eloise Houston

Trump's tax cuts will widen the trade deficit and hurt GDP

Trump's tax cuts will widen the trade deficit and hurt GDP

A dip in auto exports and rising oil prices in June drove the biggest increase in the USA trade deficit in 19 months, reversing much of May's export bonanza, the government reported Friday.

"The widening in the trade deficit in June, after three consecutive months of narrowing, suggests that some of the transitory factors that drove those trends are starting to fade", Barclays said in a note to clients on Friday.

Canada's economy showed some surprising resilience in the face of newly minted US tariffs on Canadian steel and aluminum industries with strong export growth in most other sectors softening the blow of those new duties.

Additionally, the Trump administration has threatened to impose tariffs on automobiles shipped to the US market.

"It's unclear, however, if the overall export surge can be sustained".

"Consistent with supply dynamics, the impact looks to be larger on steel than aluminum, but in the broader scheme of things, the impact thus far appears to be minimal", he said.

Exports rose 4.1 per cent to $50.7 billion, with energy shipments up 7.1 per cent to the highest since 2014 and aircraft sales jumping by nearly 45 per cent.

The data underscored the importance to Canada of the United States, which took 73.0 percent of all Canadian goods exports in June.

In May, a rush by Chinese importers to beat Beijing's looming counter-tariffs led to a surge in U.S. exports of crude oil and soybeans, temporarily driving down the deficit and boosting GDP growth in the April-June period. "As a result, trade is likely to subtract from GDP growth in the coming quarters".

The rising growth expectations and strong export performance strengthen the case for another Bank of Canada interest-rate hike, on top of last month's quarter-percentage-point increase.

Crude oil exports were mainly responsible for the gain, up 6.6 per cent to $7.2 billion on the strength of prices, but refined petroleum products also rose, by 19.2 per cent, on sales of heavy fuel oils and diesel fuel.

The United States ran goods deficits in June of $33.5 billion with China, up 0.9 per cent from May; $7.4 billion with Mexico, up 10.5 per cent; and $2 billion with Canada, up 39.7 per cent. Exports of passenger cars and light trucks were up 5 per cent in the month.

Soybean exports remained strong in June.

When adjusted for inflation, the trade gap increased to $79.3 billion in June from $75.5 billion in May. "Nominal exports jumped 4.1%, while imports edged down 0.2%".

Imports of energy products decreased 15.1 per cent to $2.9 billion in June compared with May, as Canadian refineries came back on stream following spring maintenance shutdowns.

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