Hyperventilation Over the Trade Deficit
The biggest reason for the increase is that the Trump economy is doing so well.
Earlier this week, the Commerce Department released figures on American trade, and as usual our nation was seemingly on the short side of the ledger. Among those nations and entities we had the highest negative balance with were China ($419.2 billion), the European Union ($169.3 billion), and Mexico ($81.5 billion). Also noted in the annual summary: Exports to China were down year-over-year, presumably due to tariffs set in place last year.
Predictably, the Beltway media and Democrats (but we repeat ourselves) howled in protest and blamed Donald Trump. “U.S. trade gap with China reaches all-time high under Trump,” thundered Politico’s Doug Palmer. His piece was a representative sample of the coverage, which as an added bonus liberally quoted House Majority Leader Steny Hoyer, who predictably blamed Trump’s trade policies. The report “shows that the president has flunked the test he set for himself,” charged Hoyer. “It is time for President Trump to acknowledge that his scattershot approach to trade policy is failing and explain how he intends to change course and reverse these record deficits.”
Yet it’s worth mentioning, as The Washington Times pointed out, Trump faces some serious headwinds. China’s shaky, export-dependent economy had its worst performance in almost three decades last year; meanwhile, GDP growth in the EU was less than 1% and Japan flirted with recession. Combine that with a strong dollar that’s making imports cheaper and exports pricier, and the growing trade deficit becomes more predictable.
Bear in mind: That latter factor is ironically a headwind of Trump’s own making, as our economy has seen improved growth and employment since he took office, bolstering the dollar against other world currencies backed by nations with more sluggish conditions.
So do these deficits really matter when the economy is chugging along? “Capital investment matters more to job creation than trade flows do,” opined The Wall Street Journal. The editors helpfully add that “a larger trade deficit is a benign byproduct of a healthier American economy.” Indeed, that’s true to the extent that we have consumers prosperous enough to afford the vast array of goods on the world market that aren’t necessarily created here. Moreover, the one area where we run a healthy trade surplus is in the service sector, which reflects well on the skill of our labor.
In addition, as Heritage Foundation trade economist Tori Whiting states, the trade deficit number leaves out an important piece of the economic puzzle: “Investment in America by foreign companies is everywhere. Japan’s Toyota, South Korea’s Samsung, the United Kingdom’s HSBC, and the Netherlands’ Philips all create thousands of jobs for Americans.” One can argue the benefits of foreign ownership of various icons considered “American,” such as Jeep (now part of the Italian company Fiat) and Budweiser (now owned by a Belgian conglomerate), but thousands of loyal Americans make their living creating and selling foreign-owned products thanks to our growing share of the global marketplace.
We’ll grant that President Trump won office in part because of his vow to create better trade deals, and the deficit situation on the surface looks like evidence that his approach isn’t working. But the Beltway echo chamber isn’t interested in the prime reason for the increasing trade gap. That’s because those politicos can’t bring themselves to admit the Trump economy is doing well. In fact, Democrats are invested in just the opposite, as Mark Alexander observed back in December. As if on cue, the media has whipsawed from talking about the “Trump boom” last summer to the looming “Trump recession” these days.
Yet Trump still has cards to play, as does Congress. The president is slated to meet again with Chinese President Xi Jinping later this spring at Mar-a-Lago, with the expectation of signing a new trade deal. For its part, Congress has yet to approve the deal the Trump administration reached with Canada and Mexico to replace NAFTA. Quick action on these fronts could allow us to “change course and reverse these record deficits” and, more importantly, do so without harming our economy.