The U.S. trade deficit unexpectedly narrowed sharply in October, reaching its lowest level since 2009, primarily due to a steep decline in imports, especially of pharmaceutical products. Data released by the Commerce Department on Thursday showed the goods and services trade deficit contracted significantly by 39% from the previous month, falling to $29.4 billion. This figure was lower than the expectations of all economists surveyed.
Total imports in October fell by 3.2%, reflecting a drop in shipments of pharmaceuticals and non-monetary gold. Among these, imports of pharmaceutical preparations fell to their lowest level since July 2022. Meanwhile, total U.S. exports of goods and services increased by 2.6%. These figures were not adjusted for inflation.
A clear "tariff avoidance" effect is evident behind the sharp import decline. In September, many companies stockpiled goods in anticipation of a 100% tariff on imported pharmaceuticals scheduled to take effect on October 1st by President Trump, although the tariff was ultimately postponed. Many businesses avoided this tariff by reaching agreements with the government, pledging to lower drug prices.
This year, influenced by the implementation of U.S. tariff policies, monthly trade data has shown extreme volatility. Particularly in recent months, trade volumes for non-monetary gold and pharmaceutical preparations surged and then plummeted sharply in response to Trump's fluctuating tariff announcements.
Imports of other industrial supplies and materials, such as petroleum and metals, also declined, aside from gold. However, imports of computers and accessories saw an increase. Bradley Saunders, North America economist at Capital Economics, noted in a report that this "suggests that amid the AI construction boom, other sectors of the economy are indeed showing signs of strength."
Separate government data showed that U.S. nonfarm productivity growth accelerated in the third quarter to its fastest pace in two years. This momentum is expected to strengthen further as businesses increase their investment in artificial intelligence.
The extreme volatility in trade has also impacted the government's measurement of economic activity—Gross Domestic Product (GDP). Following the latest trade report, the Atlanta Fed's GDPNow model forecast that net exports would contribute nearly 2 percentage points to fourth-quarter economic growth, with the current quarter's GDP growth estimate revised up to 5.4%.
It is important to note that gold trade is not included in the government's GDP calculations unless it is for industrial use, such as jewelry manufacturing. After adjusting for inflation—which affects the calculation of real GDP—the goods trade deficit narrowed to $63.0 billion in October, the smallest since February 2020.
Economist Troy Durie commented, "Volatile components added noise to the October report, particularly the overall trade balance figure. Looking past the noise, the report suggests that trade likely boosted U.S. economic growth at the start of the fourth quarter, despite the government shutdown."
From a regional trade perspective, the U.S. goods trade deficit with Ireland narrowed sharply. Attracted by Ireland's favorable tax environment, several major U.S. pharmaceutical companies, including Eli Lilly and Pfizer, have outsourced a significant portion of their production to the country.
Meanwhile, the U.S. trade deficit with Mexico and China widened, while the deficit with Canada narrowed. The deficit with Taiwan also expanded, likely reflecting increased imports of computers and accessories.
Data released by Statistics Canada on Thursday showed the country's merchandise trade balance swung back into a deficit, as a surge in imports of computers and electronic products outpaced a spike in gold exports to non-U.S. countries. The report also showed that the share of Canadian exports destined for the U.S. fell to 67.3%. Excluding the pandemic period, this is the lowest level since records began in 1997.