The U.S.-China trade spat is showing signs of cooling. Chinese President Xi Jinping gave a speech earlier this month in which he sounded open to making a deal, and over the weekend U.S. Treasury Secretary Steven Mnuchin said he's in the early stages of planning a trip to China. (The Chinese gave a big thumbs-up to that idea on Monday). In short, we're seeing more talking and fewer tweets and threats.
But there's one big reason it might be premature to relax about a trade war: President Trump is still obsessed with trade deficits.
Trump gets briefed often about what's going on around the world, especially before making phone calls or key decisions. He doesn't ask many questions during those briefings, Axios reported, except this one: What is the U.S. trade deficit with said country? (When asked to confirm this, a White House spokeswoman said, “The president’s tweets and public statements speak for themselves on this one.”)
As long as Trump is focused on narrowing the trade deficit, there's a real risk of more tariffs and protectionism.
To Trump, the trade deficit is a sign of weakness and economic loss. If he is serious about wanting to reduce it — either overall or with certain countries like China — he will likely turn to tariffs and quotas, which have a high potential of igniting a trade war. The other options for reducing the trade deficit are equally unpleasant.
Since taking office, Trump has tweeted 15 times decrying large trade deficits, most recently on April 4. In his tweets, he has accused China, Mexico, Canada, Japan and Germany taking advantage of the United States.
He brought up the “massive trade deficit” with Japan last week while standing next to Japanese Prime Minister Shinzo Abe during a news conference at Trump's estate in Palm Beach, Fla. The topic is likely to surface again when German Chancellor Angela Merkel visits the White House on Friday.
The United States ran a trade deficit in goods (not counting services) with 14 out of its top 20 trading partners last year, resulting in a $566 billion deficit overall in goods and services (less than 3 percent of U.S. GDP). The biggest deficits were with China, Mexico, Japan and Germany.
Even Mnuchin, who spent much of the weekend mingling with other world leaders at the International Monetary Fund and World Bank spring meetings in Washington and talking up joint approaches, made it clear that he, too, wants to see more done to narrow the trade deficits.
“We strongly believe that unfair global trade practices impede stronger U.S. and global growth, acting as a persistent drag on the global economy,” Mnuchin said during a speech at the IMF. “At this time, global imbalances are roughly a third larger than they were in the 1980s and 1990s, and there is no indication they are narrowing.”
Mnuchin then urged the IMF to “step up to the plate” and call out countries with large trade surpluses (such as China and Germany).
Are trade deficits really a problem?
The trade deficit or the trade surplus is the difference between how much the United States buys from other countries and how much it sells to them. Most economists think Trump is wrong to be so worried about the trade imbalance. They point out that the U.S. economy has continued to grow, even though it has run a trade deficit since 1975. The current economic upswing is coming at a time when the U.S. trade deficit is at the highest level in nearly a decade.
“It is an age-old fallacy to believe countries lose from trade unless their total exports exceed their imports,” Maurice Obstfeld, the IMF's research director, wrote in the Financial Times this week. “Deficits often play a vital economic role. For example, they can help countries finance productive long-term investments that ultimately raise national income and wealth.”
Trade is about more than goods shipped from one country to another. After the United States buys goods from abroad, countries such as China end up with a lot of U.S. dollars. The Chinese have turned around and invested many of those dollars into U.S. businesses and U.S. government debt.
Trade has also helped lower costs for American consumers (especially Walmart and Dollar Store shoppers), but Trump argues all that cheap stuff has come at a far bigger cost: American jobs have been lost, and wages have stagnated. Many economists counter that the United States has created millions of other jobs (mostly in the tech and services industries) to replace the lost positions, which were mostly in manufacturing. (The wages question is more complex. More economists do agree with Trump that globalization has played a role in holding wages down in the United States and western Europe).
Trump's pitch to reduce trade deficits
The Trump administration presents trade as a straightforward problem to solve: Other countries just need to buy more American stuff, and the trade deficit would disappear.
Trump suggested to Abe that Japan could close the trade deficit by purchasing more U.S.-made military equipment. But foreign governments probably won't be able to make large-scale military buys year after year. Ultimately, any trade deficit strategy would need to focus on getting consumers in countries like Japan and China to stop saving so much and buy more. That's a much harder shift to make.
How to shrink the trade deficit
What scares economists about Trump's push to narrow trade deficits substantially during his presidency is that one of the easiest ways to do that is a recession. When the United States isn't buying as much from China, Germany and elsewhere, the trade deficit narrows. When the economy recovers, the trade deficit widens.
The other key way to get the U.S. deficit down is to encourage more savings — by the federal government and consumers. When the U.S. government runs deficits (as it has since 2002), it needs other countries to buy up the debt. Since Trump took office, he has spent even more money, causing the deficit to expand, which is why most economists project the trade deficit will get larger during his tenure. It also looks unlikely that U.S. consumers are going to start saving a lot more, as they are now saving at the lowest levels since the housing bubble.
Trump has proposed another way to narrow the trade imbalance: protectionism and tariffs. Americans are likely to buy fewer Chinese goods if there are taxes on those products that make them cost more. But those countries are likely to respond by putting tariffs on some U.S. goods, triggering a trade war that will have casualties. American farmers are already deeply worried, and the Federal Reserve and IMF (among other top economic bodies) have warned Trump that a trade war would threaten the economic upswing that the United States is enjoying.
The options to shrink the trade deficit are all unpleasant: a recession, less spending or heavy protectionism. But Trump doesn't seem to want to let go of his goal.