The U.S. trade deficit plunged last year to its lowest level since 2019, reflecting both a healthy domestic economy and falling reliance on foreign countries for goods and services.
The county’s goods and services deficit fell 18.7% from 2022 to $773.4 billion in 2023, according to data from the U.S. Census Bureau and Bureau of Economic Analysis released Wednesday. Exports surged $35 billion over the past year while imports decreased $142.7 billion.
The positive news comes after the deficit increased during the Covid-19 pandemic when consumers sought out more goods while working from home. American companies have since caught up, with inventories of manufactured durable goods up five consecutive months into December.
“As trade flows have normalized, we’ve seen a narrowing and normalization in the trade deficit,” says Kathy Bostjancic, Senior Vice President and chief economist for Nationwide Mutual. The deficit widened slightly to $62.2 billion in December, up $0.3 billion from the previous month.
The shrinking deficit also reflects America’s growing GDP, which surprised many economists who had expected a recession from higher interest rates. Gross domestic product, adjusted for inflation, grew at a 3.3% annual rate in the fourth quarter of 2023, according to the Commerce Department. Surprisingly, exports increased 1.2% last year against a strong dollar on the international stage.
“In relative terms, the U.S. economy is doing pretty well. I’m no fan of Joe Biden, but he has accomplished more on his watch with regard to the trade deficit than Donald Trump did,” says Peter Morici, an economist at the University of Maryland.
On the global stage, it isn’t clear how the Gaza war might affect international trade as it spills across the Middle East. Recent attacks on transport ships in the Red Sea by Houthi rebels have snarled trade through one of the world’s busiest routes. The Suez Canal, a critical waterway connecting the Mediterranean Sea to the Red Sea, handled approximately 12-15% of global trade last year, according to the UN’s trade and development body, UNCTAD. The organization estimates that trade volume through the canal decreased by 42% over the last two months of 2023.
Besieged city of Gaza on December 8, 2023. Photo by Emad El Byed.
“I think Europe is in the bull’s eye on this one and the U.S. is probably only going to be indirectly affected,” says Stephen Stanley, chief economist at Santander US. Maritime transport is responsible for about 80% of the global movement of goods according to UNCTAD. In addition, the Russia-Ukraine war is overshadowing transit in the Black Sea and climate change is restricting volume through the Panama Canal.
For the first time in two decades, the country bought more from Mexico than China. It’s a drastic development on how global trade patterns have shifted amid growing geopolitical tensions. Increased tariffs by the Trump administration have largely been held up during President Biden’s term. In a meeting with President Xi Jinping in November, Biden raised concerns about China’s trade policies and actions against U.S. firms.
Still, imports from China far outpace other smaller Asian countries like South Korea and Japan. The trade deficit with China stood at $279 billion last year, which is still far and away the leader with the U.S. The trend “is far from a de-linking of trade with China because both countries are too big. But we have seen a diversification away from China,” added Bostjancic.