Business, Economics and Jobs

Trump warns of trade deficits. Economists say, who cares?

Shipping container.jpg

Japanese shipping containers in the port of Tokyo. In 2016, the US had a $69 billion deficit with Japan. 

Credit:

Toru Hanai/Reuters

President Donald Trump likes to talk about winners and losers. And he often warns Americans about the country’s trade deficit. So the US is clearly losing, right?

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“That’s a really wrongheaded way of looking at this,” says economist Michael Klein with the Fletcher School at Tufts University, just outside of Boston.

Economist Lee Branstetter, with Carnegie Mellon University in Pittsburgh, adds, “Mr. Trump has not done his homework, and he’s got it quite wrong.”

Both Klein and Branstetter are contributors to EconoFact — a new web site put out by a few dozen economists who tackle basic economic issues with short memos in everyday language. With regards to the US trade deficit, think of it as a simple economic equation: We’re importing more than we export. The US is running a deficit because people want to sell stuff to the US, and Americans have the money to pay for it.

“The trade deficit is not an indicator of our weakness, it’s actually an indicator of our strength,” says Klein.

One wouldn’t get that impression listening to the president’s address to Congress Tuesday night. Trump briefly talked about American jobs that have been lost due to trade and trade deals. Then he concluded with this statement: “Our trade deficit in goods with the world last year was nearly $800 billion.”

Sounds scary. But is it?

In fact, large trade deficits often coexist with a healthy economy. “The time we had [the] smallest deficit was 2008, 2009, 2010 during the depths of the Great Recession. ... Times when trade deficits were larger were in the ’90s when we had very strong growth,” Klein says.

Consider this: As the US trade deficit soared from 1992 to 2006, the unemployment rate dropped by 3 points. (People can debate whether there's a link between those two statistics, but that's what the data tell us.) And with increased imports, Americans also started getting fresh fruit on their shelves year-round and inexpensive toys for their kids. To fund all of this, the rest of the world is basically loaning the US money.

“Some of this foreign money helps fund our high-tech startups,” says Branstetter. “This inflow of capital keeps mortgage rates low.”

And the US government can borrow money cheaply too.

As long as the US doesn’t squander that money and can pay back its loans, the country is basically in good shape. Remember, Alexander Hamilton taught us: debt can be a good thing.

But hold on, hold on — Trump talks about the trade deficit in terms of American jobs. That’s his point. If China now builds cheap toys, that means a toy factory in San Diego can’t really compete. That’s true.

The US bilateral trade deficit with China was nearly $350 billion last year, nearly half of the overall trade deficit. But most economists say: So what?

“For me the bilateral trade deficits have no real meaning,” says economist Marc Melitz with Harvard University. “It’s as if you were being asked what your balance of trade was with a store at which you shop. It’s just saying we buy some goods from some countries, sell them elsewhere.”

The US has a trade deficit with China, but a surplus with countries like Costa Rica, Ethiopia and Turkey.

And trade statistics aren't an exact science. Consider an iPhone filled with many American-made parts (and parts from across Asia) — how does it get categorized?

“Assembled in China, shipped out from China to here and we count them as Chinese exports into the US. They’re not exactly Chinese exports. They’re bundles, the bundles have been made in China,” says Stephen S. Cohen, a professor emeritus with the University of California, Berkeley.

If Trump were to impose tariffs on goods coming into the US, as he threatens, economists warn that supply chains would face extraordinary disruptions. And, the price of imports to the US would go up: coffee, toys and iPhones would get more expensive. Quickly.

And America's trading partners would be sure to retaliate and make it harder to export goods to those countries, which could cost US jobs.

Add this all up and economists are scratching their heads wondering why Trump keeps harping on about the trade deficit. Klein isn’t saying to ignore the problems caused by trade; he’s saying, address the real ones.

“We should be worried about people who have lost their jobs and don’t have the skills for getting a good job,” Klein says. “We should be worried about rising inequality. We shouldn’t be worried about this specious kind of argument that’s being used as a kind of ‘us versus them’ argument, about the United States versus the rest of the world.”

Then again, blaming China or Mexico for a trade deficit and lost jobs — those make for good sound bites. And to be fair, President Trump follows a long line of US politicians, from both parties, to employ this tactic.