Trump’s Trade-Deficit Failure

By Kevin D. Williamson

Wednesday, October 07, 2020

 

There are many numbers that do not look very good for Donald Trump’s reelection hopes: The most recent polls have Joe Biden leading him by a large margin nationally and, more important, leading him in Florida, Pennsylvania, Michigan, Wisconsin, and Arizona; Trump’s approval/disapproval ratio is upside-down at 45/54, at least in part because 210,000 and counting Americans have died of the coronavirus epidemic while the president gives the impression of not taking it sufficiently seriously or of even being able to do so; there will be about 5 million fewer Americans employed on Election Day than on Trump’s first day in office; the number of pesos the government of Andrés Manuel López Obrador has expended paying for a wall along the U.S.-Mexico border is . . . 0.00.

 

But the number that may hurt the most is the one that matters least: the trade deficit.

 

The U.S. trade deficit in goods hit an all-time high in August. The big gains in exports to China that were supposed to have materialized after the much-ballyhooed (by Trump, anyway) trade armistice have failed to appear, and Americans’ appetite for imports remains as high as ever, resulting in a trade “deficit” — the term is misleading — of $83.9 billion in August. The overall trade deficit, which includes services as well as goods, was lower than the goods deficit, because Americans export a lot of high-value products classified as services. But even at the somewhat-lower figure of $67.1 billion, the overall trade deficit for August was the third-highest on record, and — this part will sting — higher than it was at any point during the presidency of Barack Obama.

 

The so-called trade deficit has always been the wrong thing to worry about and the wrong metric of success or failure, but it is the one Trump chose for himself, and, in that respect, he must be counted as a failure. This is not a surprise, in that the president himself seems to understand almost nothing at all about the issue and has chosen to surround himself with crackpots such as Peter Navarro. His big talk about trade wars’ being “great” and “easy to win” has been accompanied by a policy of consistent incompetence, one that has done serious damage to American businesspeople from soybean farmers to beer brewers. His tariffs disrupted trading relationships and supply chains, and those disruptions did not magically disappear when the tariffs were lifted. Trade is not an electric light that can be switched on and off at will.

 

The trade deficit is not a deficit in any meaningful sense of the word; unlike the federal budget deficit, it does not contribute to a mounting debt that Americans individually or collectively owe to somebody. If a lawyer buys a $5 loaf of bread from your grocer, and the grocer does no business at all with the lawyer, then he has a $5 trade deficit with the grocer — but he doesn’t owe them $5, because the transaction already has been completed. He does not end up $5 in debt, because his income is a heck of a lot more than $5.

 

Similarly, a trade “deficit” just means that the 330 million people of the United States buy more goods and services from the 8.5 million people of Switzerland than the 8.5 million people of Switzerland buy from the 330 million people of the United States. These relationships are complex, and each is different from the others: Switzerland is not among the 100 most populous countries in the world, but it is a very rich one, and so it is the 18th-largest market for U.S. exports and the 14th-largest provider of U.S. imports; the Swiss buy a lot of gold and silver from American mines to keep their vaults full — Switzerland is the No. 1 foreign trading partner of Nevada — and they sell us a lot of cheese and nice watches and medical machinery. Each country sells the other billions of dollars in pharmaceuticals. In 2018, U.S. consumers bought about $19 billion more from Swiss producers than Swiss consumers bought from U.S. producers. This does not hurt American businesses or American workers in any meaningful way (except to the extent that every seller would be happier with no competition), and it is very good for American consumers.

 

The total U.S. trade deficit for 2019 — including everything from our relatively small deficit with Switzerland to our relatively large deficit with China to our rarely mentioned trade surpluses with Brazil and the United Kingdom — added up to about 2.8 percent of GDP. That’s not nothing, but it is not a problem, either. It’s just a thing.

 

What causes trade deficits or trade surpluses?

 

President Trump and many of the so-called nationalists who share his enthusiasm for tariffs and the like believe that the cause of our trade deficits is scheming foreigners. Scheming foreigners are a perennial favorite target of populists right and left, from Donald Trump to Bernie Sanders, who broadly shares Trump’s views on trade and who was, until the day before yesterday, every inch the immigration hawk that the president is.

 

But trade policy is only one factor shaping these relationships, and, in many cases, it is not the most important one. Countries such as Japan and Singapore import the majority of their food not because wily foreigners have tricked them into doing so but because they lack the means to grow it themselves. Russia imports a great many automobiles because even Russians don’t want to drive Russian cars. (One of the most significant anti-government protests in Russia in recent years was in reaction to restrictions on importing Japanese cars. They took to the streets in Vladivostok, and spooked the Kremlin but good.) The United States, Mexico, and Canada have rich and complex trade relationships mostly because they have been thrown together by history and geography. Labor is very expensive in Switzerland, but they aren’t making any Rolexes in Port au Prince. Governments do not have infinite influence over what is produced or consumed within their borders, and attempting to accumulate that kind of power is how you make a North Korea or a Venezuela.

 

Japanese drivers do not buy a lot of American cars. That is partly a matter of trade barriers (not so much tariffs as complex and cumbrous dealership and distribution rules) but also in no small part a result of the fact that Japanese people do not like American cars very much. Like millions of middle-class Americans, millions of middle-class Japanese prefer Japanese cars; and, like millions of rich Americans, millions of rich Japanese prefer European cars. They love Buicks in Beijing, but not in Tokyo. People like what they like.

 

But what is in most cases more important than consumer behavior is investor behavior. Americans have a relatively low rate of savings, and the Chinese have a relatively high rate of savings. (Neither one of these is necessarily an obviously better stance than the other, though I will admit a prejudice in favor of higher savings rates.) Savers are investors. A Chinese businessman who earns $1 from selling a crate of flipflops to Walmart has some choices about what to do with that dollar. He could use it to buy $1 worth of goods from a U.S. buyer. He could trade it for £0.77, if he wants to buy something from a British seller who only takes British currency. Or, instead of spending it, he could save it and invest it — and the world loves to invest in the United States. A foreigner with $1 in his pocket can buy $1 in consumer goods or invest $1 in assets, and every dollar invested in assets is a dollar not available for consumer-goods purchases.

 

Trade deficits are capital inflows. As David Kreutzer puts it in his very forthrightly titled “The Uselessness of Trade Deficits in Calculating Economic Vitality”:

 

International trade is always balanced. Trade deficits are imbalances in only a single part of the total balance of international payments. Any trade deficit is offset by surpluses in other parts of the balance of payments. These offsetting surpluses in the financial account provide an economic stimulus at least as important as that from exports of goods and services. A trade deficit means that the home country receives goods and services with a greater total value than the value of the home country’s exports. However, this trade deficit is matched by an identically sized surplus in inflow of foreign investment into the home country. . . . Trade deficits are not a measure of lost income or jobs; trade surpluses are not necessarily good things nor signs that a nation is “winning” a competition.

 

Far from being a sign of economic trouble, U.S. trade deficits tend to grow a little bit when the economy is doing especially well, because a booming economy means that Americans have more money to spend, and they spend some of that money on Japanese electronics and German cars. The fact that our trade deficit is growing right now does not tell us very much about the overall economic health of the country, but it is another piece of evidence that the economy is, in fact, doing a little bit better than many economists had expected. The fact that Americans are spending on imports is probably a good sign, and the opposite would be a concerning development.

 

Of course, Trump doesn’t have the good sense to make that point, and Larry Kudlow, alas, is not the president of the United States. So Trump must be judged on his own terms — building the wall, shrinking the trade deficit — and found wanting.