Winning. Are you bored of it yet?
“We will have so much winning if I get elected,” candidate Donald Trump bellowed, “that you may get bored with winning.” And, he proclaimed, “We are going to start winning big on trade!”
Now, one full year into his presidency, are we winning at trade using President Trump’s measuring stick of the trade deficit? The answer is no, but that’s not such a bad thing.
According to the U.S. Census Bureau just last week, the U.S. trade deficit increased to $50.5 billion in November, up $1.6 billion from October. That’s the highest level in almost six years. In the period of January through November, the trade deficit rose $53.4 billion, or 11.6 percent, from the same period in 2016. Exports did increase by $4.4 billion to $200.2 billion — an all-time monthly high — but imports still increased by $6 billion to $250.7 billion.
While the trade deficit with Mexico actually shrank by almost 10 percent, the deficit with China rose to its largest amount since September 2015. The 2017 trade deficit with China is on track to be the highest year on record, with the deficit from January through November at over $344 billion, just shy of the record $367 billion deficit for the year 2015.
President Trump often cites the trade deficit as an economic scorecard and as a sign of economic weakness. Fortunately, his zero-sum view of trade is misguided. Even losing by Trump’s standards isn’t losing in reality.
The trade deficit doesn’t mean the U.S. is losing money; rather, it means Americans have purchased more goods and services from abroad than foreigners have purchased from U.S. businesses. This is due to cheaper import prices, and it allows Americans to maximize the value of their dollars.
Even more importantly, the trade deficit is only part of the picture. It is matched by a capital surplus. Capital flows into the U.S. economy because we remain an attractive place for investment. This is important because it provides the financial resources necessary to expand economic output in the country.
This tracks with history. There has been no observable correlation between an increasing trade deficit and slower economic growth during the last 41 straight years, during which the U.S. has had a trade deficit every year. In fact, the contrary is true. It was during the Great Recession, with GDP contracting almost 3 percent, that the trade deficit decreased by nearly half, from over $708 billion in 2008 to $384 billion in 2009.
President Trump seems determined to “fix” the nation’s trade deals according to the fallacy that measures economic strength by trade deficits or surpluses. But trade policy has little to no effect on the balance of trade. Rather, the trade deficit is influenced by macroeconomic factors such as savings rates, currency values, and capital flows.
Furthermore, with the passage of the recent tax cut bill, it appears Trump’s trade agenda and fiscal policy are at odds. Tax cuts will strengthen the economy by boosting consumer spending, which accounts for over 60 percent of U.S. economic activity, as well as business investment. In theory, this will cause an appreciation of the dollar, making U.S. exports more expensive relative to imports, and cause a further increase in the trade deficit.
For the U.S. to “win” at trade by Trump’s standards, a weaker dollar is necessary. But that comes at the cost of higher input costs for producers and diminishing purchasing power for consumers. Certainly not a winning picture for hard-working Americans.
The question is, will Trump continue his focus on trade deficits and his tough stance on trade? The answer may become apparent at the end of this month. The Trump administration is expected to make a decision regarding the implementation of protectionist policies on solar products and washing machines in the coming weeks. Tariffs or import quotas seem highly likely, with the U.S. International Trade Commission already bolstering the argument that increased imports from these sectors are damaging domestic industry.
Additionally, decisions are expected on whether the current level of steel and aluminum imports harm national security and whether China’s policies are reducing the value of U.S. intellectual property. Aggressive actions could trigger devastating retaliation from trading partners, resulting in higher prices on goods and services.
The focus of trade policy should be on improving access to foreign markets, limiting burdensome government and promoting competition for the benefit of American consumers – not on the trade deficit. We may losing at trade on Trump’s terms, but in real terms, we are doing just fine, and Trump should find a silver lining there. Americans have access to cheaper goods, exports are at record highs, and the economy is healthy and growing.
Jimmy Sengenberger is President and CEO of the Millennial Policy Center, a public policy think tank based in Denver, Colorado, and a radio host on KDMT and KNUS in Denver, Colorado. Jacob Dubbert is a Research Assistant at the Center and a Masters student in Global Finance, Trade and Economic Integration at the University of Denver.
If you would like to write an op-ed for the Washington Examiner, please read our guidelines on submissions here.
