Money Matters

As Trade Deficit Balloons Under Trump, He’s Doing A Rain Dance

(Source: www.forbes.com)

BOOM goes the trade deficit! In 2017 imports exceeded exports by $566 billion, up 12 percent from 2016. Which just goes to prove…

Well, there are two ways to look at this: the analytic approach and the schadenfreude approach. The latter is tempting because President Trump has emphatically and repeatedly rejected standard economic analysis and embraced the elimination of trade deficits as the one true measure of trade policy success. Today’s data release thus has the appearance of a report card, one in which the President gets very poor marks by his own unique standard.

Instead of giving in to temptation, though, let’s stick to a more analytic approach. Here, then, are some questions and answers about the new trade deficit numbers:

Why do we think this happened?

Comparing 2017 to 2016, U.S. imports grew by 6.7 percent while exports grew by 5.5 percent. Since imports were already higher than exports, this had a magnified effect on the trade deficit.

There is a temptation to crawl through the report and point out trade categories or partner countries in which there was unusual growth or decline. The problem with this is that the trade deficit is a macroeconomic variable. It is the flip side of United States borrowing. If, on net, the rest of the world sends more money to the United States in a year – either as loans or investments – that money gets turned around into a net additional purchase of goods and services from the rest of the world.

Thus, the factors that tend to drive trade deficits are factors such as savings and investment in an economy. If this sounds counterintuitive and you really want to believe that it is trade policy that sets trade deficits, we can look for a test example in which two countries have identical trade policies, but different savings and investment levels. Test result: very different trade balances.

So, a rough explanation for the 2017 trade deficit expansion would note that a growing economy resulted in increased consumption, part of which came through increased imports. Further, that growth, plus robust financial markets, invited net foreign investment.

Is the expanding trade deficit good or bad for the United States?

There is no simple answer. It is equivalent to asking whether it is a good or bad idea to borrow money. It depends entirely on what the money is used for. As a general rule, borrowing to finance an investment boom is better than borrowing to finance a consumption binge, since it requires less painful adjustment later when loans must be repaid.

This kind of subtle answer has not been in vogue during the Trump administration. The President and his team clearly prefer to interpret trade deficits as profit and loss statements – a surplus represents a win; a deficit represents a loss.

Even if one sets aside the interpretation of borrowing and lending, the scorecard approach doesn’t match very well with the sorts of economic variables we usually care about. For example, our trade deficit tends to be low when our unemployment rate is high, and vice versa.

Should we at least be concerned about the growing bilateral deficits with Mexico and China?

No! There is no economic significance to bilateral trade balances. While the United States has serious and legitimate concerns about Chinese economic practices, fixing all those practices would not eliminate the bilateral trade deficit. One could eliminate certain bilateral trade deficits by manipulating trade, but in the absence of changing national saving and investment, this is just like pushing on a balloon – the indent in one place is offset by a bulge elsewhere. And even if the United States had exactly balanced trade, there is no reason to expect that it would be balanced with every trading partner.

Why was President Trump not able to ‘fix’ the trade deficit?

The President’s vow to improve U.S. trade agreements and thereby ‘fix’ the trade deficit was a bit like someone promising to end a long dry spell by performing a rain dance. We may harbor serious doubts about whether such dances really affect precipitation levels, but it’s not really a test if the claimant doesn’t even dance.

More Info: www.forbes.com

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