Trade Deficits: Live by the Sword…?

The end of the year brings with it the announcement of the annual trade deficit. There is always a lag, so we will not see the full 2017 results until February, but in the meantime, we got a strong hint about them via the release of November 2017 data. That showed a trade deficit of $50.5 billion, a 3.2 percent increase and the highest since January 2012. For the first 11 months of the year, it was $513 billion, 11 percent more than the same period in 2016.

Now if you’re an economist, you would probably say that’s a good thing because it means that growth is picking up. Indeed, the last time our deficit shrank significantly was during the recent great recession. If you think about it, the relationship is obvious—a recession means declining growth, lower employment, and consumer retrenchment. People postpone buying things or pass them by altogether. If you look at unemployment data over the years you can see it correlates inversely with the trade deficit.

So, from an economist’s perspective, a trade deficit is double-edged sword. Over the long term, it says things about imbalances in your economy that could end up causing trouble. As Paul Krugman has said, a deficit means a country is importing current consumption and exporting future consumption. On the other hand, making it go away requires either major changes in individual lifestyles or economic policies that would have even worse short-term consequences.

Of course, most of our politicians are not economists, and they see trade from a more mercantilist perspective: deficits are bad; surpluses are good. That means in even simpler terms: exports good; imports bad. This was a very popular and widely accepted view during the reign of Louis XIV, but it began to decline in the nineteenth century when the British became apostles of free trade with great success. It returned during the Depression and then largely disappeared after World War II as the system created at Bretton Woods began to take hold and led to significant growth in global trade. Now it seems to be making a comeback, not only in the United States but in other developed countries and some significant actors like India and China where it never really went away.

The debate over free trade and mercantilism will probably never die, but there is undeniably some fun in tweaking advocates of the latter when things don’t turn out quite the way they expect. Such an opportunity exists right now with an increasing deficit and a president who promised to reduce it. Democrats, who appear to be taking seriously the admonition that the duty of the opposition is to oppose (just as Republicans did for the previous eight years), have quickly seized on the November trade figures, pointing out with some glee that what has happened is exactly the opposite of what the president said would happen, the implication being that his policies have made everything worse.

This is a classic case of “live by the sword; die by the sword.” The president created the issue by making the trade deficit a key indicator of economic success and promising to fix it, and now he has to suffer the consequences of his failure to do so. Moreover, this is data that is hard to dismiss as “fake news.” Unfortunately, the more important point that none of this really matters, or even if it did, it’s unrealistic to expect progress in less than a year, gets lost in all the dust being kicked up. The president was wrong to turn the size of the deficit into a measure of success, and the Democrats are just as wrong, or at least hypocritical, in accepting his premise so they can attack him for failing. I would like to say that there are people on both sides who ought to know better, but they are increasingly hard to find as Republicans rush to defend “their” president no matter what he says, and Democrats launch knee-jerk attacks on everything he says.

The truth is the deficit illustrates an excess of consumption over savings on the part of Americans, and the fact that we have had a deficit since 1975 shows that this is a chronic problem and not a short-term blip. The solution, as is often the case on trade issues, lies in domestic economic policy more than trade policy, and the eternal dilemma is that policies designed to promote jobs and growth like the president is advocating also promote consumption and lead to a larger trade deficit. That is the irony of the just-passed tax bill. If it has the desired effect, it will inevitably further increase the trade deficit, which means the president will once more be asked to explain his “failure,” and the opposition will once more jump in to attack him. There used to be a better way, but we seem to have forgotten it.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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