Washington Insider: US Trade Deficit Grows

New Commerce Department data are revealing a sharp increase in the U.S. global trade deficit in goods to $891.3 billion in spite of administration policies, the New York Times says this week. The Times goes further, stating “a case of textbook economics catching up” with some of the administration’s unorthodox policies. Economists have long warned that the recent tax cuts would “ultimately exacerbate the trade deficit” it has vowed to reduce. The trade war with Beijing also widened the gap, the Times said. Stiff tariffs on Chinese goods helped slow China’s economy, crimping American exports, which declined nearly 50% in December from the same month a year before. The trade deficit is the difference between how much a country exports how much it buys. It generally includes both goods and services, though the administration “has focused almost exclusively on the deficit in goods” and has long boasted that its trade policies would reduce that gap--which it views as a crucial measure of whether partners like China and the European Union are taking advantage of the United States, “a diagnosis few economists share.” In December, the overall deficit in goods and services, which includes everything from computers and washing machines to tourism and intellectual property, rose to $59.8 billion—to the highest level since 2008 when the American economy was mired in recession. Several global economic factors explain the wider deficit, the Times said. China’s slowdown has reduced consumer appetite for American goods, as has slowing growth in Europe. The strength of the dollar in global currency markets has made it cheaper for American consumers to buy foreign-made goods and more difficult for foreign customers to buy American-made ones. The Times report focuses heavily on the widening gap, which it calls a “particular irony:” By his own metric, the president is failing to right America’s global trading relationships, the Times concludes. Many observers were not alarmed by the new data. “The stronger trade deficit in the short run is telling you we’re importing more, so it’s not a particular alarming development,” said Lawrence Summers, a Harvard economist who directed the National Economic Council under President Barack Obama. However, the administration has aimed tariffs at China, Europe, Canada and Mexico to help reset those trade balances that the president says reflect “unfair practices to gain a competitive edge in global trade.” That is particularly the case with China, which President Trump and many business groups say tilts the balance of power by providing state subsidies, blocking foreign competition and engaging in other unfair tactics. While the Chinese have offered to make large purchases of American products, including soybeans and liquefied natural gas, they have resisted US efforts to force structural reforms with specific dollar targets for the trade balances, arguing that such metrics are largely beyond their control. For example, the value of China’s currency, which is determined partly by the market and partly by the government, weakened against the dollar last year, blunting the effect of the administration’s tariffs by making Chinese goods even cheaper. The currency began rising again in the fall, as President Xi Jinping of China met Mr. Trump in Argentina late last year to begin hammering out a trade pact, said Brad Setser, a senior fellow for international economics at the Council on Foreign Relations. “China certainly allowed the market to push the value of the yuan down against the dollar over the summer,” Setser said. The relative strength of the United States economy is also a large factor in the widening deficit, along with the $1.5 trillion tax cut Trump signed into law in 2017, which accelerated growth last year and which is “helping to swell the federal budget deficit, which Trump pledged to eliminate as a candidate.” However, the most recent Treasury figures showed the deficit widening, and it is on track to top $1 trillion this fiscal year. Now, Federal Reserve officials and some economists continue to warn that federal borrowing is growing too quickly and will ultimately swamp the American economy, with the United States paying huge sums of interest on the debt, and even diverting funds from social safety net programs like Medicare and Social Security. The Fed chairman, Jerome H. Powell, warned lawmakers at a House hearing last week that the federal debt was on an “unsustainable” path. Powell was asked during the hearing if he would also say that the trade deficit was unsustainable. “I don’t think I would say that,” he replied. The debate over trade policy metrics has been going on for some time and is increasingly ensnarling many participants who have favored outcomes—including many of the same groups who now are criticizing the administration for its difficulty in justifying its current policies. The fight seems increasingly bitter, one that likely will continue for the foreseeable future and which producers should watch closely as it persists, Washington Insider believes.