It has reached an all-time record high, and it’s growing rapidly in each of Trump’s years in office, even though it had completely stabilized in the previous six years.
The trade deficit in goods held steady in the 2011-2016 period, rarely varying much from about $730 billion. In fact it actually declined insignificantly in that period, from $736 billion in 2011 to $730 billion in 2016. But it has shot up in the Trump era, increasing by about 8% in 2017, then more than 10% in 2018.
That’s true, but it doesn’t mean we’re miserable failures.
Despite what our Chief Executive thinks, the trade deficit is not an economic scorecard which is directly correlated to success or failure. As our contributor Adam keeps reminding us, economics is a complicated field. The trade deficit is a complex equation involving currency strength, relative prosperity, economic growth rates, and a bunch of other factors that are way too abstruse for me, but I’m sure Adam will edify us about any place where I have left gaps.
Some trade deficits can be bad, others are not at all.
Let’s say a rich but very cold country called McDuckburg really needs warm wool clothing, but has few sheep and a highly educated populace with with few people willing to work in sheep raising unless they get the comfortable wage package necessary to live adequately in McDuckburg, with its high cost of living. This situation, high demand + low supply + high producer costs, causes home-produced wool clothing to be tremendously expensive. Meanwhile, a poor country named Beggarland, given its temperate climate, is filled with sheep, and has a work force that is thrilled with a low wage to raise sheep and make clothing from them. Moreover, and that relatively low wage gives them a decent standard of living in Beggarland. The people of Beggarland can’t afford to buy any of the computers and luxury autos produced by McDuckburg. Therefore, there is a massive trade deficit, as McDuckburg only buys and Beggarland only sells.
Now does that mean McDuckburg loses on the deal? Of course not. Its people get something they need, and they get it at a very low price. That also frees up buying power which gets poured into other sectors of the economy. That trade imbalance is good for both countries. It would be foolish and inefficient for McDuckburg to try to cultivate a domestic wool market, especially if their government had to subsidize sheep farmers.
Now that all seems obvious when I label it with imaginary names, but people will actually argue against it if I substitute real country names and and talk about real products. Nearly half of the trade deficit of The United States is with China, but there’s a logical reason for that, and it’s quite similar to the theoretical Beggarland example. They can produce things we want, and can do so far cheaper than we can.
There are also other logical reasons why the trade gap is suddenly widening after years of stability, with China and elsewhere, despite the President’s protective tariffs.
(1) His tariffs inspire counter-tariffs, thereby reducing American exports;
(2) China’s economy is sluggish, thus reducing their ability to buy American goods, and further reducing American exports. Exports to China actually declined in 2018, while imports increased, despite the tariffs.
(3) We just had a big tax cut in America, and tax cuts increase demand for goods, including foreign goods, thus increasing American imports.
(4) The dollar is very strong, thus making it cheaper for American consumers to buy imports, and more difficult for foreign customers to buy our exports.
(5) Some American companies have been rushing to stockpile imported goods before Trump imposes tariffs.
Again, it’s complicated, and in some ways the burgeoning trade deficit with China is a sign that the US economy and the dollar are strong while the Chinese economy and the yen are not.
But President Trump is not a complex thinker. He thinks trade deficits are automatically bad, so it will be interesting to see how he’ll react to this news. Obviously, he will not admit that he is directly responsible for something he considers bad, so he has only two other options:
(1) Reverse his position, say the trade deficits are actually a good indication, reflecting a strong dollar and the powerful economy he has built, although some things may still need tinkering, and maybe he could ease or completely re-evaluate his tariffs;
(2) continue to believe deficits are evil, and find somebody or something else to scapegoat, while doubling down on his foolish tariff strategy.
Now the first option is totally positive, would cause the stock market to respond positively, and even gives him a chance to crow about his successes. The second is not only negative and petty, but woefully ignorant.
Negative? Petty? Ignorant? That was probably the motto on his business card. My money is on #2.