If nothing else, the latest U.S. trade deficit — $621 billion in 2018 for goods and services — should give President Trump a lesson in the economics of trade. Trump has insisted that a successful policy requires a trade surplus (good) and the absence of a deficit (bad). That’s wrong, as many economists have argued. The economists are right.
Not only is the deficit sizable; it’s also $119 billion, or almost 25 percent, larger than the deficit in 2016, $502 billion, the last year of the Obama presidency. By Trump’s own standard, his policy has failed, even as he implausibly claims that it hasn’t. Had he heeded economists, both liberal and conservative, he could have avoided this embarrassment.
He might also have seized an opportunity to educate the public about trade, because millions of Americans — almost certainly — share his view that only exports (and the jobs tied to them) benefit the nation, while imports do the opposite (because they destroy jobs).
If that were true, then the rising trade deficit would have caused a sharp decline in jobs and, possibly, even triggered a recession. We all know this hasn’t happened, in part because Trump keeps reminding us of all the jobs created on his watch. That would be 4.9 million from January 2017 to January 2019.
How can employment grow when the trade deficit is rising? The main explanation — as I’ve argued for years — is that the U.S. dollar is the dominant global currency. It’s used by many countries, companies and individuals (not just the United States and Americans) to conduct trade, to finance business, to borrow and lend across borders, to hedge against the instability of other currencies and, of course, to support criminal activity.
This unique role — no other currency comes close to serving as global currency — feeds demand for dollars on foreign exchange markets, raising the dollar’s price. A higher-priced dollar in turn makes U.S. exports more expensive and U.S. imports cheaper.
Presto, there’s the formula for persistent trade deficits. We provide a service to the world economy — the dollar’s global role — and other countries repay us by sending us imports. But these effects are not shown in the official statistics. If they were, the U.S. deficit would shrink or become a surplus.
It’s not surprising that since 1980, the United States has run current account surpluses only in 1980, 1981 and 1991. (The current account is a broad measure of trade.) Nor is it surprising that each of these surpluses was associated with a recession, which reduced Americans’ demand for imports. If Trump truly wants a trade surplus, the easiest way to achieve it would be to cause a worldwide economic collapse.
The reality is that the U.S. economy is growing faster than the economies of most developed countries, and this has raised both the trade deficit and domestic job growth. Stronger U.S. economic growth increases Americans’ demand for imports; weaker foreign growth reduces demand for U.S. exports.
Two caveats must be added.
First, imports do eliminate some U.S. jobs, but so does competition between American-based businesses. Job losses from the 2007-2009 Great Recession were far greater than declines caused by trade. It’s also worth recalling that the benefits of trade extend beyond jobs; imports mute price increases, provide more consumer choice and promote competition.
Second, although unfair business practices aren’t yet the main cause of trade deficits, the Trump administration is right to object loudly to the special treatment that China gives its cutting-edge industries. These measures include subsidies, intellectual-property theft and the coercion of foreign companies to participate in joint ventures with Chinese partners.
The irony is that Trump’s devotion to the trade deficit as an indicator of success or failure has made the task of curbing China’s unfair practices even harder. It’s not just the United States but also Japan, members of the European Union and other countries that feel victimized by Chinese behavior.
Trump’s goal should be to unite these China critics into a common negotiating front rather than allowing China to play one country off another, as is now occurring. But if ending U.S. trade deficits is the main objective, this becomes virtually impossible, because deficits exist with so many other countries.
Trump and the rest of us are trapped by his rhetoric. If we pursue a trade surplus, we’re doomed to fail.
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