US trade deficit widens to $98.4 billion in December

On Monday, the US trade deficit substantially widened to -$98.4 billion in December from -$78.9 billion in November, surpassing consensus expectations. This increase was largely driven by a 4.1% rise in goods imports and a 4.2% decrease in goods exports. The services sector performed slightly better, with imports and exports rising by 1.4% and 0.5% respectively.

The goods trade deficit with Canada saw a notable increase, going from -$5.0 billion to -$7.9 billion, while the deficit with Mexico remained relatively stable at -$15.2 billion. The deficit with China was virtually unchanged at -$25.3 billion, and the deficit with the European Union (EU) tightened marginally to -$20.4 billion. A significant part of December’s overall deficit expansion was attributed to a trade imbalance with Switzerland, which surged from -$3.9 billion to -$13.0 billion.

Citi economists, after reviewing the advance trade data released last week, have not found clear evidence that the strong imports in December were due to businesses front-loading ahead of anticipated tariffs. However, with tariff threats becoming more concrete in recent weeks, there is a risk of further deficit widening, especially with Canada and Mexico, following the 30-day tariff delay announcement.

Industrial supplies imports, particularly "finished metal shapes," were the primary contributors to the rise in imports, with a monthly increase of 19.1%. Notably, about three-quarters of the $11.3 billion seasonally adjusted increase in goods imports came from Switzerland, amounting to an additional $8.4 billion. Although the surge in imports from Switzerland does not seem to be related to tariff front-loading, the unusually large increases in imports from Australia and Hong Kong suggest potential one-off factors at play, such as seasonal adjustment issues.

The decrease in exports, which was seen across various sectors, also played a significant role in the trade deficit’s expansion, with the most significant drops in the auto and industrial supplies sectors.

Trade figures are expected to remain volatile in the upcoming months due to tariffs and the threat of tariffs. The front-loading of trade, particularly with Canada and Mexico, could become more apparent in February after the tariff delay. This is likely to affect both exports and imports, especially in the energy and auto sectors, and could result in a further widening of the trade deficit, potentially impacting GDP growth in the first quarter. This effect might be balanced by stronger investment or inventory figures.

Additionally, tariffs on Chinese imports have been implemented as of February, along with some retaliatory tariffs on US exports, which could lead to reduced trade volumes with China.

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