With a Tax Win, Trump Sacrifices His Goal of a Smaller Trade GapBy and
Official data showing drop will be misleading, Goldman says
Unclear how Trump team’s trade officials will respond
President Donald Trump’s victory on tax cuts could doom another of his top campaign promises: shrinking the U.S. trade deficit.
Imports will probably pick up as households and companies spend some of the money they’re getting back from the government on foreign goods and services, economists said. Exports could be crimped if the dollar rises on the back of faster U.S. economic growth, higher interest rates and repatriation of corporate profits from abroad.
“The real effect will be to widen our trade deficit,” said Douglas Holtz-Eakin, president of the American Action Forum think tank in Washington.
The effect as calculated by the government, though, could be quite different because of the way the trade data are compiled. If the tax legislation induces companies to book more of their profits in the U.S. rather than in tax havens overseas -- as it aims to do -- that would boost measured U.S. production and exports and thus lower the trade deficit reported by the government.
“The change in the official trade statistics following tax reform could be misleading,” Goldman Sachs Group Inc. economists said in a note to clients. “The measured trade deficit might appear to narrow even as the true economic trade deficit widens.”
Republicans lawmakers are poised to pass a sweeping tax overhaul that slashes the corporate rate to 21 percent from 35 percent and offers an array of temporary breaks for individuals and other types of businesses.
In its first year, the Trump administration floundered in making progress narrowing the export-import imbalance through better trade deals. During the first 10 months of the year, the U.S. imported $666 billion more in goods than it exported, compared with a $621 billion deficit from January through October last year.
What Our Economists Say ...An accelerating economy, partially fueled by the Republicans’ tax reform package, would likely lead to a wider, not narrower, trade deficit -- accounting idiosyncrasies aside. The U.S. economy is primarily driven by domestic components, particularly consumer spending and, to an increasing degree, business investment. The bulk of goods that U.S. consumers and businesses acquire are imported.
--Yelena Shulyatyeva, Bloomberg Economics
How the Trump administration will react to the shifts in trade is unclear, Holtz-Eakin said. While the president has made reducing the deficit a priority, his focus has been on gaps with specific trading partners such as China that do not serve as tax havens and thus would not be affected by the shift in reported profits.
Several of the administration’s trade initiatives are expected to come to a head next year, including the renegotiation of the North American Free Trade Agreement.
The Commerce Department is probing the national-security risks of steel and aluminum imports, and the U.S. Trade Representative’s office is considering penalties against China for violating U.S. intellectual property.
While proponents and critics of Trump’s tax plan generally agree that it will lead to a larger trade deficit, they disagree over how worrying that is, if at all.
Supporters argue that the $1.5 trillion in tax cuts will encourage companies to spend more on capital goods, including some imported from abroad. That, in turn, will boost worker productivity and allow the economy to expand more quickly.
“If you are growing faster than other countries, you will probably get an increase in the trade deficit,” said Stephen Entin, senior fellow with the Tax Foundation in Washington and a former U.S. Treasury Department official. “The better the economy, the bigger the trade deficit will be.”
Albert Liguori, a managing director at tax advisory firm Alvarez & Marsal in New York, said the foreign companies he speaks with worry that the plan will lead to increased competitiveness on the part of their U.S. rivals.
“The U.S. companies have had shackles on them for the last 30 years,” he said. “Those shackles are being released as a result of this tax reform.”
Some analysts though are skeptical that the money that the government will have to borrow from abroad to finance the tax cuts will generate a lasting improvement in gross domestic product.
That’s because much of it will be spent on consumption, and not on investment, according to Brad Setser, who worked at Treasury from 2011 to 2015 and is now a senior fellow at the Council on Foreign Relations in New York. He said that companies are not cash-constrained so giving them more won’t lead to added capital spending.
Mark Zandi, chief economist for Moody’s Analytics, also doesn’t see much in the way of long-term gains, although growth in the short run will be pumped up by the fiscal stimulus.
He reckons that the impact of the program on the measured trade deficit will be a wash.
“The actual trade deficit will widen by approximately 0.3 percentage points of GDP, but because of the accounting of profit-shifting by multinationals the measured trade deficit will not change much,” he said.
— With assistance by Andrew Mayeda, and Randy Woods