The Commerce Department reported Tuesday that the U.S. trade deficit in goods and services rose 12 percent to $566 billion last year, biggest since 2008. A record $2.9 trillion in imports swamped $2.3 trillion in exports last year.
The deficit in the goods trade with China — frequently accused of unfair trading practices by the White House — hit a record $375.2 billion in 2017. The goods gap with Mexico climbed to $71.1 billion.
To be frank, President Trump’s obsession with the trade deficit was always misplaced, a function of his ignorance about trade and the economy more generally. At times, Trump talks as if the trade deficit is something we “owe” to China or other countries. In fact, it is the difference between what we export and what we import.
Trump might now understand that a trade deficit isn’t a bad thing at all. For one thing, it puts U.S. dollars in the hands of foreigners who can turn around to invest in the United States. (That’s what Trump was trying to encourage in Davos, right?)
Nor is a trade deficit indicative of high unemployment. We have not lost “millions of jobs” through NAFTA or other trade deals. At a time when the trade deficit is high, we are at full employment. A trade surplus is nothing to pine for, Scott Lincicome of CATO reminds us (“the last time we ran a trade surplus was the halcyon year of 1975” — when we had high inflation and high unemployment). In fact, foreign employers in the United States (including some who’ve announced the bonuses that Trump brags about) are an increasingly large source of jobs. As Pew pointed out in December: “Foreign-owned companies employed 6.8 million workers in the United States in 2015, up 22% from 2007, according to preliminary data from the U.S. Bureau of Economic Analysis. The increase is notably larger than overall U.S. private employment growth, which was 3.6% over the same span. . . . Overall, foreign-owned companies accounted for 5.5% of all U.S. private sector employment in 2015, up from 4.7% in 2007.” In essence, the trade deficit comes back to us in the form of dollars used to hire many U.S. workers.
Economists have been trying to explain all of this not only to Trump, but also to politicians in both parties, who have found protectionism politically popular. As PRI reported in March:
In fact, large trade deficits often coexist with a healthy economy. “The time we had [the] smallest deficit was 2008, 2009, 2010 during the depths of the Great Recession. … Times when trade deficits were larger were in the ’90s when we had very strong growth,” [Tufts economist Michael] Klein says.
Consider this: As the US trade deficit soared from 1992 to 2006, the unemployment rate dropped by 3 points. (People can debate whether there’s a link between those two statistics, but that’s what the data tell us.) And with increased imports, Americans also started getting fresh fruit on their shelves year-round and inexpensive toys for their kids. To fund all of this, the rest of the world is basically loaning the US money.
“Some of this foreign money helps fund our high-tech startups,” says [Carnegie Mellon economist Lee] Branstetter. “This inflow of capital keeps mortgage rates low.” And the US government can borrow money cheaply too.
In fairness to politicians, the media often confuses matters, breathlessly reporting on the trade deficit as if it were a sign of economic doom. Perhaps now that the trade deficit has soared, Republicans at least will regain their former status as free traders. It surely would help avoid economic calamities (e.g. pulling out of NATO). PRI, again:
“For me the bilateral trade deficits have no real meaning,” says economist Marc Melitz with Harvard University. “It’s as if you were being asked what your balance of trade was with a store at which you shop. It’s just saying we buy some goods from some countries, sell them elsewhere.” . . .
“We should be worried about people who have lost their jobs and don’t have the skills for getting a good job,” Klein says. “We should be worried about rising inequality. We shouldn’t be worried about this specious kind of argument that’s being used as a kind of ‘us versus them’ argument, about the United States versus the rest of the world.”
It’s time to admit that the anti-trade deficit hooey has been part of an uninformed populist political campaign. So rather than accuse Trump of “failing” to get the trade deficit down, those who understand the benefits of robust trade should use this as a data point to argue against protectionism, which only hurts U.S. consumers, U.S. businesses with an international supply chain and even U.S. workers employed by foreign firms.