Deficit, Shmecifit!
September 8, 2020
Having solved the world’s trade problems last week, I now turn my attention to the situation in the United States and take a look at the trade deficit. This is a good time to do that, as the Commerce Department just released data for July and the first seven months of 2020. Obviously, the past seven months have not been a typical time period for anything, including trade, but that will not prevent me from drawing some conclusions and suggesting a remedy, albeit a painful one.
Talking about “fixing” the trade deficit, of course, implies that it is a problem. The president clearly thinks so and has said so many times. He promised in his last campaign to eliminate it. Most economists will tell you not to worry too much about it, that it is simply a reflection of our habitual under-saving and overconsuming. I don’t entirely agree with either of them, but we can save that debate for another time. Today, let’s look at a few figures and evaluate the president’s efforts.
If you look only at July, the news is not good for the president as the goods and services deficit increased by 19 percent over June and hit its highest monthly level in 12 years. The goods deficit alone reached its highest monthly level ever—$80.9 billion. Exports were up (to $168.1 billion, from $155.5 billion in June), but imports were up more (to $231.7 billion, from $208.9 billion in June). In the context of the pandemic, this is actually good news because it suggests the economy is beginning to return to normal after its very sharp drop in the spring.
“Normal,” of course, is not what the president promised. He predicted a significant reduction generally, and particularly with China. (More on China below.) Looking at year-to-date data reveals a somewhat more modest picture but still not a good one for the president. For the first seven months of 2020, the deficit was $354.9 billion, a slight increase over the same period in 2019 ($348.5 billion). So, a modest increase, but an increase nonetheless during a pandemic when most economic activity halted and in the wake of the much-touted China phase one deal. Also, if the current trend continues, we can expect the 2020 deficit to be greater than that in 2016, the last year of the Obama administration. In fact, the goods and services trade deficit in every year of the Trump administration has been worse than in 2016.
Looking at China specifically, for the first seven months of the year U.S. goods exports were $58.5 billion, well below the same period in 2017 ($69.3 billion). In the phase one deal, China agreed to increase its purchases of U.S. goods and services by at least $200 billion over the next two years compared to that 2017 figure. Conclusion: the Chinese are behind in meeting their commitments. I am one of those resisting a premature judgment on this—I think they will end up doing better than current expectations, but with each passing day it becomes more difficult for them to reach 100 percent of their target.
Overall, the data show the president has fallen short of his promises and that the world’s greatest dealmaker is not that. If asked, he will tell you none of this is his fault. The sign Harry Truman famously had on his desk—“The buck stops here”—seems to have disappeared.
The truth is that some of it is not his fault. The economists are correct that the deficit is really a measure of consumption and savings, and long-term changes in it will require changes in human behavior. Americans have done that, most recently in the Great Recession of 2008-9, but they do not stick with it long.
Much of the damage, however, is self-inflicted. The large dose of stimulus the president and the complicit Congress delivered in 2017 through the tax bill reduced unemployment and increased growth, which, in turn, increased the trade deficit. Simply put, people bought more stuff, and a lot of it was imported.
Trump ignored those macroeconomic realities and tried to “solve” the deficit with tariffs, a tactic that was doomed to failure. They inevitably lead to retaliation, which leads to loss of U.S. markets. Just ask our farmers if you want details, but there are also plenty of manufacturers hurt by his policies, either because their parts and components have become more expensive because of U.S. tariffs or because their exports have become more expensive because of retaliatory tariffs, or because of both.
Does any of this matter for the election? Probably not. Poll results suggest that while people have views on trade, they tend to base their votes on other issues. It will, however, be an issue in the debates. The president will brag about his victories, and former vice president Biden will argue that they are not victories at all. Neither will provide the real answer demonstrated in 2009—if you want to reduce the trade deficit, have a recession. That’s not a recommendation, just an observation, and perhaps a hint to the president that some promises may not be worth keeping.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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