As trade deficit explodes, Trump finds he can’t escape the laws of economics

Written by on March 6, 2019

After two years of ‘America First’ policies, the United States is likely to post the biggest trade gap in its history. The gap with China is also set to hit a record.

The Commerce Department said Wednesday that the United States last year posted an $891.2 billion trade deficit in merchandise, the largest in the nation’s 243-year history despite more than two years of President Trump’s “America First” policies.

The results were a sobering reminder that the laws of economics still apply to a president who had promised to supercharge economic growth while simultaneously shrinking the chronic U.S. trade deficit.

Those twin promises proved incompatible, as economists had predicted.

By cutting taxes and taking the lid off government spending, Trump gave the economy a shot of adrenaline. By thinning government regulations, he sought to further spur growth and hiring.

But as these efforts boosted take-home pay, Americans spent more on foreign-made iPhones, Toyotas and Heinekens. And as the U.S. economy surged ahead of Europe’s and Japan’s, four Federal Reserve interest rate hikes lifted the dollar, making American exports more expensive.

“Macroeconomics end up ruling. You can’t wish it away. You can’t tariff it away,” said William Reinsch, a former Commerce Department official now at the Center for Strategic and International Studies.

The president wants to shrink the trade deficit. The Fact Checker explains why a deficit isn’t all bad.

Tariffs became a key part of Trump’s strategy for shrinking the trade deficit, the difference between the country’s high import bill and its lower export sales. He used the import taxes — on solar panels, washing machines, steel, aluminum and assorted Chinese goods — to force China and other countries into negotiations, with the aim of rebalancing trade flows.

But while negotiations remain underway — with hopes of a deal with China this month — the data released Wednesday showed that significant improvement in the nation’s trade balance remains an ambition rather than an achievement.

Even with China, which has been hit hardest by U.S. tariffs, the trade gap reached a record $419 billion last year.

Administration officials say they are working to overcome decades of poor trade policy.

Trump this month labeled the trade deficit a “disaster,” blaming “horrible deals” negotiated by his predecessors and rampant cheating by U.S. trading partners. The president told a cheering crowd that he was “standing up for the American worker,” something a president was doing “for the first time in many, many decades.”

His chief trade negotiator, Robert E. Lighthizer, said last week that the administration has taken steps toward “a more balanced and sustainable trading system” by renegotiating agreements with South Korea, Canada and Mexico, seeking a new deal with China and by increasing enforcement of U.S. trade laws.

But if the president’s goal is to close the trade deficit, the Commerce Department’s final 2018 report, which was delayed by the partial government shutdown, showed how ambitious a goal that is.

Last year’s goods shortfall topped the 2006 record of $838.3 billion, which was set as the housing bubble was peaking, and marked the third consecutive year of rising deficits.

A broader measure, which includes the services sector, showed a $621 billion deficit — more than $100 billion greater than the figure Trump inherited from President Barack Obama.

It has been evident for months that Trump was not shrinking a trade gap that he calls “unsustainable” and says represents a major transfer of wealth from Americans to foreigners.

The president now begins his reelection drive with a core campaign promise unfulfilled — and with a recent flurry of economic research showing that his embrace of tariffs is damaging the U.S. economy.

“During the campaign, Donald Trump claimed that large trade deficits represented failed leadership and flawed trade policies,” said House Majority Leader Steny H. Hoyer (D-Md.). “It is time for President Trump to acknowledge that his scattershot approach to trade policy is failing and explain how he intends to change course and reverse these record deficits.”

The president often cites the trade deficit as an indicator of U.S. decline and a sign that other nations discriminate against American companies. Many economists see it as far less consequential, except as it reflects Americans’ collective overspending.

Just as he vowed to eliminate the trade deficit, Trump had also promised to trim the U.S. federal budget deficit, a perennial Republican goal. During the 2016 campaign, he had pledged to balance the budget “relatively quickly.”

But instead, the tax cut and boom in government spending has spawned more red ink, with the budget gap expected to hit $900 billion this year and the national debt nearing $18 trillion.

All that borrowing enables Americans to ramp up their spending, including on imported goods, widening the trade deficit.

The second ingredient in the swollen trade deficit is the high dollar, which acts as a price increase for American exporters, making it harder to compete with foreign rivals. Today, the dollar is 19 percent above its 10-year average against the currencies of major U.S. trading partners, according to Federal Reserve data.

The Commerce report comes amid indications that negotiations with China may be in their final weeks. Trump has been more eager for a deal as markets gyrated in recent months and forecasters said his tariff wars were threatening U.S. economic growth.

China has offered to buy a reported $1.2 trillion in additional American products over the next six years in a deal that reportedly would ease each side’s tariffs, usher in changes to Beijing’s state-led economic model and include tough new enforcement mechanisms.

“One thing is for certain,” wrote Chris Rupkey, chief financial economist for MUFG Union Bank, wrote in a note to clients. “There will be a U.S. and China agreement on trade as the administration cannot allow the uncertainty to take a toll on economic growth any longer. Not when the presidential election is less than two years away.”

But any such deal may not change the dynamics widening the trade deficit, many economists say.

Increased Chinese purchases of U.S. goods would probably mean fewer sales to other countries, shrinking the trade gap with China but leaving the global balance largely unchanged. With the economy at or close to full employment, U.S. farms and factories have a limited ability to sharply increase output to meet a sudden increase in Chinese orders.

“That reality is not going to change,” said economist Matthew J. Slaughter, dean of the Tuck School of Business at Dartmouth College.

In a 2016 campaign speech, Trump called the trade deficit a “politician-made disaster” and promised swift change. “We can turn it all around — and we can turn it around fast,” he said.

Trump has used tariffs more aggressively than any other American president since the 1930s. In a speech Saturday, he called them “the greatest negotiating tool in the history of our country” and credited them with bringing trade partners such as China to the bargaining table.

“Billions of dollars, right now, are pouring into our Treasury,” he told the Conservative Political Action Conference, adding that Chinese exporters are absorbing almost the entire burden of the tariffs.

But a pair of new studies concludes that he is wrong. “When we impose a tariff, it is the domestic consumers and purchasers of imports that bear the full cost of the tariffs,” said David Weinstein, an economics professor at Columbia University, who co-wrote one of the papers.

Weinstein said the president appears to be relying on a 2018 analysis of data from the 1990s, when the United States represented a larger share of the global economy and enjoyed more leverage over exporters in other countries.

Weinstein’s study, co-written with Mary Amiti of the Federal Reserve Bank of New York and Princeton University’s Stephen J. Redding, reviewed what actually occurred last year after U.S. tariffs took effect. It concluded that Americans paid the entire tariff bill.

second study — by four economists from the University of California at Los Angeles, Yale University, the University of California at Berkeley and Columbia University — reached the same conclusion.

The best chance of the trade deficit shrinking anytime soon would require an economic downturn that no one wants. In 2009, amid the Great Recession, the trade deficit fell 40 percent from the peak three years earlier, to about $506 billion.

“If you want to lower the trade deficit, have a recession,” Reinsch said.

Source: As trade deficit explodes, Trump finds he can’t escape the laws of economics


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