Although there is some debate about the size of the annual "trade deficit" run by the United States, there is no doubt of its existence, nor that it is large. Donald Trump has recently been tossing out a figure of $800 billion for the annual trade deficit. Others counter that that figure represents the "merchandise" trade deficit, while the U.S. actually runs a surplus in trade in services. Net that out, and you would get a figure of about $566 billion. It's still more than 5% of U.S. GDP, and a rather large number in absolute terms.
Is this some kind of a problem? It's been going on for most of my life (the U.S. last ran a "trade surplus" back in the 70s), while over those last several decades the U.S. economy has grown and then grown some more. I would say that the trade deficit is merely a reflection of the fact that many foreign sellers of goods or services to the U.S. prefer either to hold the dollars they have received for a while, or to invest them in the United States, rather than turn around immediately and use the dollars to buy some U.S.-made goods or services. After all, a trade deficit is just the mirror image of an investment surplus. If you bought more goods and services than you sold, then somebody must have either accumulated your currency or made an investment in your country. Indeed, accumulation of your currency is itself a form of investment in your country -- the equivalent of an interest-free loan to the government.
Nevertheless, over the same past several decades, the conventional wisdom has been that trade deficits are a problem, and bigger trade deficits are a bigger problem. Journalists came to report any increase in the trade deficit as a "worsening," and a decline in the trade deficit as an "improvement." Funny, but those usages seem to have diminished significantly in the age of Trump, but here is an example from Market Watch just a week ago: "U.S. Trade Deficit Worsens in January." Of course, you have no trouble reading that to mean that the trade deficit increased.
I thought readers might enjoy a comparison between two descriptions of the consequences of the U.S. trade deficit, one the version of President Trump, and the other written from the perspective of a consumer in China. You would think that they couldn't possibly be talking about exactly the same thing, but in fact they are.
First, President Trump.
From Trump's remarks to reporters on March 5: "We lost, over the last number of years, $800 billion a year. Not a half a million dollars, not 12 cents. We lost $800 billion a year on trade. Not going to happen. We got to get it back.”
Trump tweet, March 3: "The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!"
Trump tweet, March 2: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.”
Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States. The Chinese government does so through a number of avenues, including:
- Limiting yuan convertibility, and keeping the yuan's value artificially low
- Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export
It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers. A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese. So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts. We Chinese send our resources, our capital, and the output of our most productive workers overseas to be enjoyed by American consumers, and what do we get in return? A trillion dollars or so of foreign exchange surpluses that our government invests for 2% returns in US government bonds. Yes, that's right -- not only are we subsidizing American consumers, but we are subsidizing their taxpayers by financing their government's debt at low interest rates.
They can't both be right. Somebody here must have it all wrong!
I think that Trump is right about at least one thing, namely that the Chinese leaders have been "laugh[ing] at what fools our leaders have been" for these past few decades. But that's because the Chinese leaders are themselves smug, self-important fools, congratulating themselves on their cleverness even as they are getting taken to the cleaners. During the same period, I and other with-it people in the U.S. have been laughing at the Chinese. Come and join us in the mirth!
Meanwhile, I also have no doubt that the U.S. producers of steel and aluminum feel aggrieved. (Indeed, I know some of them. They definitely feel aggrieved.) But what are the American consumers supposed to do when somebody offers them deeply discounted and subsidized goods? Millions of consumers are made better off, and overall American wealth increases at the expense of the Chinese people, while a relative handful of American producers need to find other gainful employment. It's not great for them, but there is no good alternative. Tariffs, at best, will bring back a small fraction of the steel and aluminum jobs, while costing a much greater number of jobs in steel- and aluminum-consuming industries.
The good news is that the steel and aluminum industries in the United States by this time employ so few workers that Trump's tariffs -- even if they go into effect -- will be barely noticeable in the overall picture of the American economy. For example, the U.S. steel-producing industry is down to about 140,000 workers (about 0.1% of U.S. employment) from well over half a million in the 1970s (and from a workforce that was only about half as big).
Meanwhile, there is little question that the ongoing resurgence in economic growth is going to lead to further increases in the trade deficit. That's the way it always works.