In defending his threatened new tariffs on steel and aluminum, President Trump has made a number of statements about trade deals and deficits. Here’s a guide to the rhetoric.
“We lost, over the last number of years, $800 billion a year. Not a half a million dollars, not 12 cents. We lost $800 billion a year on trade. Not going to happen. We got to get it back.”
— Trump, remarks to reporters, March 5
We are going to keep explaining this until we are blue in the face but countries do not “lose” money on trade deficits. For some reason, the president must have missed this lesson in economics class when he attended Wharton.
A trade deficit simply means that people in one country are buying more goods from another country than people in the second country are buying from the first country.
Americans want to buy these products from overseas, either because of quality or price. If Trump sparked a trade war and tariffs were increased on Canadian or Chinese goods, then it would raise the cost of those products to Americans. Perhaps that would reduce American purchases of those goods, and thus reduce the trade deficit, but that would not mean the United States would “gain” money that had been lost. Meanwhile, trade deficits are also affected by macroeconomic factors, such as the relative strength of currencies, economic growth rates, and savings and investment rates.
The president has said he wants to rescue jobs in the steel and aluminum industries. But many economists say more jobs could be lost in industries that rely on those materials for their products. Airplanes and airplane parts are one of the big export industries in the United States, helping to reduce the trade deficit, but the industry also uses a lot of aluminum. So higher costs for raw materials may increase the cost of jets and reduce sales overseas.
The Trade Partnership, a consulting firm, released a report that concluded that five jobs would be lost for each one gained. In all, the report said, about 33,000 jobs would be gained, while 179,000 would be lost, for a net loss of about 146,000 jobs. (Caveat: Such estimates should be viewed with caution. We are only offering this as an illustrative example of the potential economic impacts. Still, when President George W. Bush imposed steel tariffs in 2003, his action may have saved as many as 10,000 jobs but cost up to 200,000 jobs.)
The U.S. trade deficit in 2017 was $566 billion, according to the Commerce Department. Trump gets his $800 billion number by looking only at the deficit for trade in goods ($810 billion) even though U.S. trade in services runs a substantial surplus of $244 billion.
Interestingly, the recent annual report by the White House Council of Economic Advisers, which the president signed, offers a relatively benign view of trade deficits. “The United States has a goods deficit and a services surplus with the world,” the report noted. “The services surplus is consistent with the structure of the private sector, which has evolved during the last few decades toward more services output as a share of GDP.”
The president’s consistent use of the word “lose” to describe trade deficits is worthy of Four Pinocchios.
“We’ve had a very bad deal with Mexico, a very bad deal with Canada. It’s called NAFTA. Our factories have left our country. Our jobs have left our country. For many years NAFTA has been a disaster.”
— Trump, remarks to reporters, March 5
First of all, the United States has a trade surplus with Canada. Once again, Trump is ignoring trade in services to make a pejorative claim about the biggest export market for the United States — and the second-biggest trading partner.
Second, long before he was a politician, Trump was dismissive of the North American Free Trade Agreement. But he consistently exaggerates the effects. Here’s how the nonpartisan Congressional Research Service in 2017 summarized the impact of NAFTA:
“The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP [gross domestic product]. However, there were worker and firm adjustment costs as the three countries adjusted to more open trade and investment.”
Now, a quarter-century after NAFTA went into effect, the United States, Canada and Mexico constitute an economically integrated market, especially for the auto industry. Auto parts and vehicles produced in each country freely flow over the borders, without significant tariffs or other restrictions, as thousands of parts suppliers serve the automakers that build the vehicles. This is known as the “motor vehicle supply chain.”
The manufacturing sector has declined as a source of jobs in the United States, but again Trump would be fighting against economic shifts long in the making. American manufacturing has become incredibly productive, so fewer workers are needed to make the same number of goods.
The industries are not dead.
Trump is focused on aluminum smelting jobs, but that’s only 3 percent of total aluminum industry jobs in the United States, according to the Aluminum Association. The rest of the jobs are in aluminum production and processing, which has been relatively consistent since 1980. The North American aluminum market is integrated, with much of the smelting taking place in Canada, one of the United States’ closest allies, where electricity costs are lower because of hydropower. (Aluminum smelting is an energy-intensive industry.)
Meanwhile, U.S. steel exports as a share of the domestic market are only 27.5 percent, about the level in 1997. Monthly crude steel production has been consistent since the Great Recession, according to data compiled by trade lawyer Scott Lincicome. Fewer workers are required because the factories are run more efficiently.
The president is referring to a favorite example of his — Harley-Davidson motorcycles. India recently announced it would reduce the duties from 100 percent to 50 percent, but Harley already got around that higher duty by assembling in India most of the 4,500 motorcycles sold in the country. (Trump in the past has also accused India of selling “thousands and thousands” of motorcycles in the United States, but it’s only about 1,000.)
Harley, for its part, says it is indifferent to the matter and has no objection to India’s import duties. Wisconsin Gov. Scott Walker (R) also says the Wisconsin-based company opposes higher tariffs for steel and aluminum because of the potential negative impact on its sales.
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