Narrowing of the trade deficit could be short-lived

March 12, 2026

The US trade deficit narrowed -25.3% in January to $54.5 billion, more than market expectations. Exports increased 5.5%, while imports declined 0.7%. High-frequency trade data had shown more activity in January, but extreme volatility in pharmaceuticals and gold continued to mask underlying movements in both imports and exports. The deficit is down 57.6% from a year ago in January, when importers scrambled to stock up ahead of tariffs. 

We saw major shifts in prices that further distorted what those figures mean for the GDP measures. However, headline figures continue to mask underlying shifts in the trade deficit and what those changes imply for overall economic growth as calculated in the GDP figures. The headline number is not adjusted for inflation.

After adjusting for inflation, the narrowing of the trade deficit was much less than implied by the headline figures. The goods deficit adjusted for inflation declined 14.3%, versus an 18.0% drop before adjusting for inflation. 

The improvement in the trade deficit is even smaller after removing gold for investment purposes, which is not included in the GDP calculation. Exports of nonmonetary gold accounted for $4.7 billion of the $14.6 billion total increase in exports. Imports of nonmonetary gold accounted for approximately $1.1 billion to the total $2.8 billion drop. After taking out nonmonetary gold, the trade deficit narrowed significantly less, by about 11.8%.

Imports outside of nonmonetary gold declined by $1.7 billion. Continued volatility in pharmaceuticals continued to drive the overall numbers: they declined $3.4 billion alone. Imports of automotives shrunk significantly, by $2.8 billion on broad-based declines in imports of trucks, passenger cars and engines. Imports slowed for most consumer goods, foods and beverages and capital/industrial goods outside of high tech.

High-tech goods continued their upward march. Imports of capital goods increased $3.4 billion on computers, telecommunications equipment and semiconductors. Many of those imports have tariff waivers and feed into data center construction. Cellphones, natural gas and copper showed some increases, albeit a fraction of the high-tech goods needed to serve growing data centers.

Exports increased $9.9 billion after accounting for nonmonetary gold, a stronger reading than what exports had been showing for much of 2025. Exports of capital goods increased $5.4 billion, split between computers and their accessories and civilian aircraft. Exports of soybeans continued to recover and drive gains in agricultural exports. Exports of industrial supplies outside of nonmonetary gold posted gains with exports of nongold precious metals up $4.1 billion and small increases in natural gas and chemicals. 

Exports of automotives and consumer goods came in weak. Pharmaceutical exports fell $2.1 billion; that accounted for most of the $2.8 billion decline in consumer goods exports. Automotive exports plunged $733 million on passenger cars and parts and accessories. US automotive manufacturers, wholesalers and retailers have seen some of the largest margin compression from the tariffs in 2025. 

Despite the large narrowing of the overall deficit, there was a mixture of movements by trading partners. Deficits narrowed with large trading partners like Canada, Mexico, India, Japan, Malaysia, Taiwan and Thailand. We shifted from a deficit to a surplus with Europe, mainly on gold and pharmaceuticals with Switzerland and the UK. The deficit with China moved sideways, bucking the trend of a narrowing deficit; the deficit with Vietnam expanded. A smaller surplus appeared with South/Central America, led by Brazil. We switched from a surplus to a deficit with Africa. 

It is important to note that we have seen a lot of volatility in the trade deficit both between and within quarters in the wake of tariffs. The Supreme Court ruling that the emergency powers the admiration used to levy 60% of its tariffs illegal has opened yet another window for a front-running wave in imports.