Congratulations! The trade deficit dream came true
The Trump administration’s dream of reducing the trade deficit is finally coming true. According to data generated from the U.S. International Trade Commission website, for the first two months of 2020, the U.S. trade deficit dropped to $113.5 billion. That’s down from $130.4 billion over the same period last year, a 13 percent decrease. If this keeps up, then we are on track to reduce our trade deficit from $852.2 billion for the entirety of 2019 to $742.3 billion in 2020.
Think I am being flippant? I’m not.
Needless to say, everyone recognizes that the overall direction of the economy is grim. But this is what reducing the trade deficit looks like: Relative to our exports, we import less. Today, we are importing less because Americans are consuming less during an economic shut down.
And that’s not all. We are probably on track to shrink the trade deficit even more this year. U.S. unemployment insurance weekly claims reached over 5.2 million for the week ending on April 11, bringing the total number of Americans filing for unemployment to approximately 22 million over the past month. Consumer confidence declined sharply in March, which reflects consumer sentiment — that is, their overall desire to go out and buy things, including imports.
Bear with me and let’s get technical for a moment. What we are talking about here is the national income accounting identity. Students of ECON 101 learn it on day one of class: A country’s total national output, or gross domestic product, is the sum of government consumption, private consumption, investment and exports.
Government consumption + private consumption + investment + exports. This is accounting, not a behavioral equation. It is beyond dispute.
Imports are a part of consumption. (Stay where you are and repeat this sentence three times: Imports are a part of consumption.) The only reason imports are subtracted from GDP in the accounting equation is that statistical agencies keep track of all consumption regardless of where it was produced. Because our statistical agencies also keep track of imports, they subtract those from the GDP equation to avoid double-counting it.
Not recognizing imports as consumption is like saying you are watching your calorie intake, but you ignore the food you eat at restaurants and only count the calories from homemade food at your kitchen table.
When the president’s trade advisor Peter Navarro points to the negative sign in front of imports in the GDP equation, he is essentially saying that going through the drive-through doesn’t count toward our calorie intake. You may wish that was the case, but it’s not. Just like your dietician counts the fries and shake you eat from the drive through, it is all consumption.
To accountants, this is a straightforward notion to grasp, including my sister-in-law who teaches undergraduate accounting. When our Thanksgiving dinners turn to talk about U.S. economic woes, she winces at the fiscal deficit, not the trade deficit. She gets it. Yet for some reason, trade officials in the current administration (and, to be fair, many in past administrations) can’t quite seem to wrap their heads around this.
Sadly, many policymakers and commentators point to the idea that any negative trade balance between imports and exports must be bad for the economy. This leads them to the conclusion that a country should always aim to export more than it imports. It also leads to some potentially harmful policy ideas. Feel-good “Buy America” policies do little for the trade deficit. Steel and aluminum tariffs have increased costs for U.S. manufacturers while U.S. steelmakers continue to shrink, with stock prices of these companies in a deep slump even with the import protection.
President Trump ran his campaign against the trade deficit. But once he got to the White House, he succumbed to runaway federal spending and borrowing, which simply inflated that deficit as other countries financed our debt. Now, the U.S. economy is in an induced coma, and that is sharply reducing our demand for imports and reducing the trade deficit. The irony is that the pandemic is fulfilling one of his campaign promises. Nobody is treating it like good news — but this dream coming true just highlights why the metric is so flawed.
Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.