Trump’s Fear of Trade Gaps Isn’t Really Necessary: QuickTake Q&ABy
Donald Trump dislikes trade deficits so much that he made them a cornerstone of his campaign for the U.S. presidency. He says they are a sign of a shrinking manufacturing base and loss of American might. He blames trade deficits on bad deals that weak U.S. leaders negotiated. Now, he calls into question the morals of countries, like Germany, that have large trade surpluses with the U.S. In a May 25 meeting with European Union officials, he called Germany "very bad" for selling millions of its cars in the U.S. In a May 31 Twitter blast, he wrote that Germany’s "massive" trade deficit with the U.S., at about $68 billion, is "Very bad." Trump is even considering changing the way trade deficits are calculated to put more political oomph behind his efforts to revamp trade pacts, including the North American Free Trade Agreement, or Nafta. Problem is, trade deficits don’t always mean what Trump says they do.
1. Doesn’t a deficit reflect a weak economy?
Not necessarily. A trade deficit can mean a country’s consumers are prosperous enough to buy a lot of imported goods. China and other countries with a surplus own lots of dollars as a result, and they often reinvest those dollars in the U.S. When the economy is growing and employment is increasing -- in other words, when all is well -- the U.S. trade deficit generally grows. Seven years after the U.S. signed Nafta, the trade deficit hit a record high, yet unemployment had fallen to 3.8 percent -- the lowest point in three decades. But when the economy is contracting, the trade deficit usually shrinks, as it did during the 2008-2009 recession.
2. What is the U.S. balance of trade these days?
With exports of about $2.2 trillion and imports of about $2.7 trillion, the U.S. had a trade deficit of $502 billion in 2016, up slightly from $500 billion in 2015.
3. Isn’t $502 billion a huge deficit?
Yes, but the trade deficit has been above $400 billion since 2002, so many economists (except for a few Trump advisers) have learned to accept them. The last time the U.S ran a trade surplus was 1975. The deficit ballooned after China’s entry into the World Trade Organization in 2001 greatly expanded U.S. imports from there. The U.S. is by no means in deficit everywhere; it has a trade surplus with many countries, including Saudi Arabia, Hong Kong and the Netherlands.
4. Why does Trump put the trade deficit at $800 billion?
That’s the number he often uses, as he did in his Feb. 28 address to a joint session of Congress. It takes only manufactured goods into account, rather than goods and services (which is how it’s properly calculated). The U.S. in 2016 had a $248 billion surplus in services and a $750 billion deficit in goods, netting a $502 billion deficit.
5. Are trade deficits as simple as exports minus imports?
Short answer? Yes. Long answer? Still yes, but there’s more to the story -- and this is where it gets complicated. Most of the world calculates trade deficits by subtracting total imports from total exports. Within total exports, however, there are two subcategories: domestic exports and re-exports. Domestic exports are things made or improved in the U.S. and then exported. Re-exports are goods that come into the U.S. and are sent back out, unchanged. They both count as total exports.
6. How might Trump change the calculation?
The Wall Street Journal reported that he wants to calculate the trade balance without re-exports, which would make the deficit look much bigger. They’re counted because re-exports include inventories and used goods, key components of the global supply chain. The problem is that excluding re-exports would overstate the deficit unless they are excluded from imports, too.
7. Does anybody else want to change the formula?
Yes, but not the way Trump does. Most economists think the traditional exports-minus-imports worldview is outdated. An iPhone has parts manufactured and designed in dozens of countries, but because China finishes the product, it gets an outsized portion of the credit. A better method would evenly distribute credit along the supply chain, so that each country’s trade balance depends on the value of its contributions.
8. Did a U.S. surplus with Mexico become a deficit after Nafta?
Yes, Trump’s right on that score. In 1993, the U.S. had a small, $1.7 billion surplus with Mexico on about $82 billion in trade. By 2016, it had a $61.7 billion trade deficit, but on trade that had surged to $586 billion. Most experts would prefer the latter scenario because the growth in overall trade is indicative of robust economic activity.
9. Who benefits from trade?
A famous study in 1999 documented that trade in general helped lead to a burst of economic growth in developing countries, which in turn helped them become consumers of exported U.S. goods, which created jobs at home. Also, when imports exceed exports, jobs lost to cheaper labor overseas over time were often balanced with better-paying jobs domestically. Other studies have shown that foreign competition helps make American producers more efficient.
10. And what about the losers?
Until about 2000, most workers displaced by trade managed to find new jobs. But that didn’t happen after China was allowed into the WTO. China at the time kept the value of its currency low relative to the dollar, heavily subsidized its exports and had a vast supply of low-wage workers. Those factors made it hard for U.S. manufacturers to compete, so they closed plants and moved jobs abroad. Another landmark study showed that workers in the Midwest who were most exposed to Chinese competition were unable to recover; some of those regions, which voted heavily for Trump in the 2016 election, are still feeling the effects of lost jobs and wage cuts.
11. Do trade deficits decrease growth, as Trump’s advisers say?
No. A country’s gross domestic product -- the total value of what it produces in goods and services -- comes from four places: consumption, investment, government spending and net exports (meaning exports minus imports). For a trade deficit to reduce economic growth, net exports would have to be a large negative number to make the entire equation negative. Imports also can make a positive contribution to the three other components (consumption, investment and government spending), and don’t necessarily make a country poorer.
The Reference Shelf
- A Bloomberg Gadfly article says about one-fourth of the 1.3 million German cars sold in the U.S. in 2016 were also made in the U.S.
- Bloomberg View columnist Noah Smith writes that Trump adviser is making a rookie mistake on trade deficits.
- This letter was signed by 370 economists protesting Trump’s trade, labor market, regulatory and other economic policies.
- Two left-leaning economists take a less-benign view of trade deficits.
- A Bloomberg graphic explains the numbers behind the trade gap (in goods only) between the U.S. and various countries.
- Two international organizations, the OECD and World Trade Organization, are working on a new value-added measure of trade.