You Bet America’s Trade Deficits Matter
Wages, cost of living, and jobs all suffer from lopsided flow of goods
It’s become commonplace in the 2016 presidential campaign to hear presumptive Republican nominee Donald Trump charge that America’s massive trade deficits are inflicting massive and entirely avoidable damage on the U.S. economy (chiefly major job losses) — and for major economists and pundits to dismiss his claims as proof of his ignorance about international commerce and basic economics.
Even worse, say nearly all these ostensible experts, Trump’s proposed remedies — threats of tariffs on imports, actual levies, and other measures to convince footloose American-owned companies to bring offshore factories back home — would backfire disastrously. They would surely prompt retaliation from the nation’s infuriated trade partners, and raise prices for import-dependent consumers and businesses, even if foreign economies failed to respond.
Think of it as the Made in Washington deficit, and in inflation-adjusted terms, it’s slowed the current recovery by more than 20 percent.
The out-of-the-blue success enjoyed this presidential cycle both by Trump and by Democrat Bernie Sanders makes clear that Main Street Americans already view the nation’s trade performance as a dangerous failure. And ironically, the strongest evidence that they and the maverick candidates are mainly correct comes precisely from the mainstream economics that the experts keep citing (though selectively at very best).
A trade deficit is simply an excess of imports (what a country buys from overseas) over exports (what it sells abroad). Running deficits in and of itself isn’t necessarily a problem — just as being in debt as such isn’t necessarily a problem. What are big problems, however, are (as with debts) deficits that get too large or grow too fast.
If a trade deficit — which is also a gap between what the nation consumes and what it produces — becomes too big, the credit needed to pay for the excess could become either unavailable, or very expensive. Lenders may get spooked about that nation’s ability to pay them back.
Luckily for the United States, that prospect currently seems far-fetched. Its total trade deficit is certainly big. At $506.8 billion at an annual rate before adjusting for inflation as of the first quarter of this year, it amounts to 2.78 percent of America’s entire economic output. Still, the trade shortfall is significantly smaller in absolute and relative terms than at its peaks, in the middle of the previous decade’s economic bubble.
Yet the trade deficit is inflicting unacceptable damage — mainly because it’s not only large, but also growing rapidly. Even though it’s apparently been forgotten by Trump’s critics, for decades, an axiom of mainstream economics has long held that when a nation’s trade balance worsens, its economic growth slows. (Conversely, an improving balance speeds up growth.)
And since the last U.S. recession ended, and the current, historically feeble recovery began, the increase in the trade deficit has slowed the expansion by 9.07 percent after adjusting for inflation. (The after-inflation figures are the most closely followed economic growth figures.)
In other words, had the deficit simply stayed where it was during the second quarter of 2009 ($366.3 billion on an annualized basis) rather than rising to $561.2 billion, America would have produced nearly $195 billion more worth of goods and services over the last seven years or so. Further, although there’s heated disagreement over how many jobs are destroyed by burgeoning trade deficits, there can’t be any legitimate doubt that whatever slows growth slows hiring, too.
Most economists (and pundits) deny that trade deficits and their growth-slowing activities have anything to do with the kinds of trade policies that Trump and Sanders have attacked. And sometimes that’s true — as with countries that are simply outgrowing the world at large, and therefore pulling in outsized amounts of imports. But that’s not the case for the United States and its booming trade deficit.
It’s officially called the non-oil goods deficit, and it consists of those U.S. imports and exports other than trade in services (where trade liberalization efforts are in relatively early stages) and in oil (which is never dealt with in trade talks, and where American trade flows have improved dramatically thanks to the domestic energy production revolution).
Think of it as the “Made in Washington” deficit, and in inflation-adjusted terms, it’s slowed the current recovery by more than 20 percent, or just over $430 billion. At a time when the economy is expanding at a meager 0.8 percent annual rate after inflation, meaning that America needs every bit of ounce of growth it can get, this Made in Washington trade drag is completely unaffordable.
In addition, examining the Made in Washington deficit more closely reveals that it’s dominated by manufacturing. Inflation-adjusted numbers aren’t available, but in pre-inflation terms, this shortfall topped $830 billion (a record) last year, and so far it’s running at a slightly higher rate this year. As a result, enormous amounts of America’s demand for manufactured goods are being supplied from abroad, and the output of Made in America products today in inflation-adjusted terms is still no more than 4 percent of its pre-recession peak — which came more than eight years ago.
Manufacturing’s doldrums matter for the rest of the economy because the sector still leads the nation in productivity growth (which is crucial for raising living standards on a sustainable basis) and innovation (employing the lion’s share of U.S. science and technology workers). Its relatively high wages (which have been stagnating until earlier this year) also help prop up national pay levels — which urgently need propping up. But sky-high and mounting trade deficits keep casting ever darker shadows on domestic manufacturing’s future.
Luckily, voters this year have a choice. Not only has Trump strongly supported a genuine trade policy overhaul, but Clinton has faulted America’s longstanding approach in only narrow terms. Having already demonstrated that they understand in their guts why trade deficits matter, they’ll get the chance in November to show how much.
Alan Tonelson, who writes on economic and security policy at RealityChek, is the author of “The Race to the Bottom” (Westview Press, 2002).