The U.S. trade deficit jumped in January thanks in large part to increased imports as consumers continue to spend.
The shortfall in January hit $67.4 billion, up 5.1% from the previous month according to data released on March 7 by the Commerce Department. It’s the largest trade gap since April 2023. The increase stands in stark contrast to the annual data for last year which showed the deficit shrunk the most since 2009.
Imports of goods and services rose 1.1% compared to the previous month. It’s the highest level in a year at $334.6 billion. Mizuho America’s Steve Ricchiuto puts it simply, “We are a huge consumer economy. We don’t produce these goods, and we won’t.”
Consumer spending during the Covid-19 pandemic is a big reason the trade deficit spiked. It has since normalized over the past few years. “It’s a combination of two things that are finally working to bring the trade deficit down,” says Chris Low of FHN Financial. “The first is onshoring and the second is energy exports which are back at record highs after the pandemic.”
The January import average price of crude oil was the lowest since September 2021, which would tend to dent the deficit. The surge that month points to even higher imports in other areas like capital goods which were the highest on record for January.
Imports of automotive vehicles, parts and engines were also the most on record. Even so, leaders in stump speeches and quarterly reports like to talk about reviving domestic car production.
California-based Rivian finally unveiled its new sport utility vehicle, dubbed ‘R2,’ and will be produced in the company’s existing facility in Normal, Illinois. The car is expected to start around $45,000 to better compete with Tesla’s offerings.
Senators Gary Peters and Debbie Stabenow of Michigan and Sherrod Brown of Ohio recently urged the Biden administration to increase import tariffs on Chinese electric vehicles, Reuters reports. The three Democrats argued cheap Chinese vehicles will endanger the U.S. automotive industry and pose national security risks.
The U.S. imported more last year from Mexico than China for the first time in 20 years, according to last month’s report. It felt like an inflection point for a country that relies on China for so much of its manufacturing and production needs. The shift posits a few possibilities including geopolitical tensions over Taiwan and supply chain issues stemming back to the pandemic.
The trend with Mexico continued into this year, jumping $1 billion from December to January.
International companies looking to add a manufacturing footprint in Mexico and other Latin American countries look to consultants like John Paul McDaris of Entrada Group. He’s seen increased interest in moving a portion of a company’s production to the Americas.
Mexico is a top choice given its proximity to the U.S. “Mexico is close to home. They’re also looking at 16% population growth over the next 20 years, while only 4% for the U.S.,” says McDaris.
Over the past 15 years, he’s also analyzed countries like El Salvador, Honduras, and Brazil for possible factory sites. His company almost did a deal to produce medical devices in Costa Rica but it fell through due to high costs in the small country. Still, he does not expect Mexico to replace a lot of China’s manufacturing.
“I am honestly being very cautious when I tell people that a bunch of stuff is coming to Mexico and Latin America,” adds McDaris. “My disclaimer on all this is China’s not going away. All of the raw material comes from China.”