Widening deficit puts Trump's trade fallacies on full display

Widening deficit puts Trump's trade fallacies on full display

As President Donald Trump grows increasingly confident in his approach to trade, new data undermine his core motivating beliefs. The more he slaps tariffs on allies and adversaries alike, the larger the trade deficit grows.

Last Wednesday, the July trade numbers showed the U.S. deficit in goods and services climbing to $50.1 billion from $45.7 billion in June and $42.6 billion in May. This is particularly noteworthy because this was the period in which the Trump administration ramped up its protectionist onslaught.

ADVERTISEMENT

In the beginning of June, it slapped tariffs on previously-exempt steel and aluminum imports from Canada, Mexico, the European Union and others. On July 6, the Trump administration applied tariffs to $34 billion worth of imports from the People’s Republic of China.

To be fair, monthly trade numbers can be volatile; for example, they can shift up or down with the delay of a Boeing jet shipment. But if we look at the cumulative January-July trade numbers each year (to control for seasonal factors), the U.S. overall trade deficit grew from $288 billion in 2016 to $316 billion in 2017 to $338 billion in 2018.

Does this prove that President TrumpDonald John TrumpSunday shows preview: Trump sells U.N. reorganizing and Kavanaugh allegations dominate Ex-Trump staffer out at CNN amid “false and defamatory accusations” Democrats opposed to Pelosi lack challenger to topple her MORE’s trade policies have failed? No. One can certainly make that case, but it’s not in these numbers. They do show, however, that the underlying premise of President Trump’s approach to trade is wrong.

His distinctive approach has two key tenets, both incorrect:

1. Trade deficits serve as a scorecard. The president has repeatedly used deficit numbers to represent U.S. “losses” on trade.

2. Trade deficits (losses) are the result of terrible, horrible, no-good, very bad trade policies. Presumably good, tough trade policies would bring surpluses, or at least reduced deficits.

President Trump’s first 18 months in office have put these tenets to the test, and they have failed. The president has not been shy about lauding the state of the economy.

In June, as the monthly trade deficit was mounting, he tweeted: “the economy is the best it’s ever been with employment being at an all time high, and many companies pouring back into our country…”

In fact, economic performance has been very good. Numbers released last week showed unemployment at 3.9 percent. In the second quarter of 2018, real GDP grew at a 4.2-percent rate.

While the president can take pride in this performance, the contemporaneous improvement of the economy and growth of the trade deficit strongly suggest that the trade deficit is a poor indicator of national well-being.

In fact, it’s common for the trade deficit to rise in good economic times and fall during recessions; notably, it fell sharply during the global financial crisis.  

Meanwhile, on the policy front, the president has boldly replaced decades of U.S. leadership in trade liberalization with his own protectionist approach. By his reasoning, this more sensible approach should have shrunk the deficit. Yet it did the reverse.

So what really happened? The trade deficit reflects macroeconomic factors, not trade policy. It is the necessary counterpart of a gap between national investment and national savings. If the United States borrows from the rest of the world, it must necessarily run a trade deficit.

Further, the policies pursued under the Trump administration have seemed almost designed to expand the trade deficit. A principal goal of the tax cut enacted at the end of 2017 was to stimulate corporate investment in the United States. Meanwhile, that tax package was structured to dramatically increase federal borrowing.

Unless there were a jump in corporate, household or state or local saving, this would mean increased national investment and decreased national saving. That would imply an increase in the trade deficit.

Any serious economist could have explained this relationship beforehand and many did; the trade deficit numbers show we were not kidding.

Does it matter that President Trump’s understanding of trade policy and trade deficits is flatly contradicted by data? Absolutely. If the president cannot tell the difference between winning and losing in trade, it should be no surprise that he has been pursuing the wrong policies for the wrong reasons.

His protectionist trade policies have hurt American businesses, workers and farmers, with no benefits to show, even by the president’s own favorite measures.

Further, U.S. trade demands based on fundamental misunderstandings of how trade works are likely to leave trading partners befuddled, particularly if they have a clearer conception of the economics at play.

Such confusion would be expected to lead to painful and long-lasting impasses in trade battles. And that is exactly what we’ve seen.

President Trump unabashedly rejected conventional understandings of how trade works. Recent deficit data unabashedly reject President Trump’s approach to trade.

Philip Levy is a senior fellow on the global economy at The Chicago Council of Global Affairs and an adjunct professor of strategy at the Northwestern University Kellogg School of Management.