Former President Donald Trump declared in 2018 that his newly renegotiated trade deal with Canada and Mexico would be the most “balanced trade agreement in the history of our country.” The United States’ trade deficits with Canada and Mexico, however, continue to soar.
The Commerce Department released new trade figures Wednesday showing the combined U.S. goods trade deficit with Canada and Mexico hit $220 billion in 2023, up from $85 billion in 2017 – the year Trump took office and forced the two countries into a renegotiation of the decades-old North American Free Trade Agreement.
Overall, the United States’ goods trade deficit with the rest of the world was $1.06 trillion in 2023, down from $1.18 trillion in 2022, the Commerce Department report showed. The goods trade deficit was $750 billion in 2016, just before Trump took office.
Trump’s failure to reverse those deficits, despite successfully renegotiating the country’s biggest trade deal and slapping billions of dollars worth of tariffs on a range of other foreign trading partners, only adds to the doubts about his aggressive second-term plans to hike tariffs even further to flip America’s trade balance.
The former president’s campaign advisers say that if he returns to the White House in 2025, Trump would consider raising duties on all imports coming into the country, while slashing business taxes beyond the cuts he made in 2017 — steps he and his advisers argue will help rebuild U.S. manufacturing and create better-paying jobs at home. Some economists, however, predict the economic impact of those actions could offset each other, leaving the trade deficit largely unchanged.
Ed Gresser, an economist and former trade official in both Democratic and Republican administrations, said the main effect of Trump’s tax and trade plans for his second term would “be to lower living standards in the United States” by increasing the cost of goods for both businesses and consumers. “It would be significantly inflationary,” far more than the tariffs that Trump imposed during his first term on China and steel and aluminum products, he added.
In 2016, Trump campaigned on a promise to bring back American manufacturing in part by putting an end to bad trade deals. That included renegotiating NAFTA, which he described as “perhaps the worst trade deal ever made.”
“Since NAFTA’s adoption, the United States racked up trade deficits totaling more than $2 trillion — and it’s a much higher number than that — with Canada and Mexico,” the former president noted in his 2018 Rose Garden remarks celebrating the new USMCA agreement. “They make cars. They make products. They make everything in another country. They send them into the United States — no tax.”
USMCA would change that, he promised at the time.
Trade deficits with both Canada and Mexico, however, have continued to climb since the updated agreement went into force in July 2020. The trade deficit with Mexico was nearly $111 billion in 2020. It fell slightly in 2021, but has risen in each of the past two years. The increase in the trade deficit with Canada is even more striking since it was only about $14 billion in 2020.
The Commerce report shows the U.S. trade deficit with Mexico totaled a record $152 billion in 2023. And car imports continue to be a driving force behind that deficit, despite Trump’s emphasis on boosting U.S. auto production. The USMCA included a number of tough new provisions targeting the Mexican and Canadian auto sectors for just that purpose — for example, raising the amount of regional content included in a vehicle made in Canada and Mexico for it to qualify for the lower U.S. tariff rate. The Commerce report, however, shows the auto and auto parts trade deficit with Mexico hit $130 billion last year, compared to $83 billion in 2017.
Similarly, the overall trade deficit with Canada reached $68 billion in 2023, although that was down from $80 billion in 2022. The U.S. had a $19 billion deficit in passenger car trade with Canada but ran a small overall surplus in auto and auto parts trade with its northern neighbor.
The statistics illustrate how little Trump and his team understood the U.S. economy and how tax and trade policy work, said Gresser, who is now vice president for trade and global markets at the Progressive Policy Institute, a think tank closely aligned with centrist New Democrats.
“They didn’t understand what the trade deficit really meant and therefore they were not able to reduce it,” Gresser said, noting that other economic factors like how much a country invests and saves have a far larger influence on the size of the deficit than trade policy.
The big tax cut Congress passed during the Trump administration cut U.S. savings and boosted U.S. spending, pulling in more imports from abroad, Gresser said. Trump’s tariffs on more than $300 billion worth of Chinese goods “squeezed” the trade deficit with that country but caused it to swell with other countries, such as Mexico and Vietnam, he added.
A Republican trade specialist who spoke on the condition that he not be identified provided a glimpse of how the Trump campaign might defend the numbers.
He argued the trade deficit figures were not as bad as they looked, particularly for Canada, since much of the growth reflects higher U.S. energy imports from its northern neighbor. That’s not as bad as having a deficit in the manufacturing sector, he said.
Regarding Mexico, he pointed to the “massive” growth in two-way trade between the United States and Mexico, which totaled nearly $800 billion in 2023, compared to $556 billion in 2017. That also reflects significantly higher U.S. goods exports to Mexico, taking some of the sting out of the higher deficit number, the Republican trade specialist argued.
In addition, some of the growth in imports from Mexico represents goods that the United States used to import from China, which he said was a positive development. Finally, the USMCA’s tougher automotive trade rules are not completely phased in so it’s too early to say that they are not working, the Republican trade specialist argued.
All in all, “I don’t think it’s a particularly bad result,” the Republican trade specialist. But if there are problems, the Trump administration built in an automatic review process beginning in year six of the agreement that would allow the three countries to make changes to the pact, he said.
U.S. auto sector employment has also grown under the USMCA, with help from additional government incentives provided by the Biden administration’s Inflation Reduction Act, said Scott Paul, president of the Alliance for American Manufacturing, a union-affiliated group that supported Trump’s renegotiation of USMCA.
“We’ve seen more factory announcements for auto and major auto part production coming to the United States than at any time over the last couple of decades that NAFTA was in effect, and so that clearly is a positive development,” Paul said.
However, U.S. auto industry employment was also rising during the later years of NAFTA and the recent increase in the number of those jobs looks like a return to that upward trend following a sharp drop during the pandemic, Gresser said.
Some groups are already calling for the U.S. to renegotiate or abandon USMCA because of increased Chinese investment in Mexico to take advantage of that country’s duty-free access to the United States. “It’s clear that USMCA has become the US-MX-China Trade agreement due to transshipment from China and the China investment boom in MX,” Nick Iacovella, a spokesperson for the Coalition for a Prosperous America, a group that supports protectionist industrial policies, said in an email.
For its part, the Biden administration says it doesn’t consider the trade deficit a good guide of whether a trade agreement is working or not, echoing the view of mainstream economists.
Deficits “might be a core criteria for the previous admin, but macroeconomic factors such as relative savings and investment levels and country growth rates affect trade balances far greater than trade policy changes such as FTAs,” USTR spokesperson Angela Perez said in an email. “There is no direct link between trade agreements and the trade deficit.”
The Biden administration considers the USMCA a success because trilateral trade with Canada and Mexico supported more than two million jobs as of 2021, and that’s a much more relevant number than the size of the deficit, Perez suggested.
USTR also has aggressively used a new USMCA tool that was included at the insistence of congressional Democrats to push tougher enforcement of workers’ rights in Mexico, which Perez argued was another measure of the success of the agreement.
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Trump promised to rebalance trade in North America. The US trade deficit keeps climbing. - POLITICO
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