On June 3, 2018, the Appleton Post-Crescent published the below guest column. The hard-copy edition does not contain either the graphics or hyperlinks provided here.
President Trump views trade deficits in goods (imports greater than exports) as bad for the US and claims policy should be directed at reducing the total of $811 billion excess of imported over exported goods in 2017, with a particular focus on reducing the $375 billion goods deficit with China. Current U.S. trade policy often serves special interests (e.g., steel, sugar, or textiles) but negatively impacts most of us. Viewed in isolation, a trade deficit is neither bad nor good but depends upon both how it is measured and a country’s economic circumstances.
To understand trade deficits, consider the following.
- Since manufacturing accounts for only 11.6% of the U.S. economy and only 8.4% of non-farm payroll employment , a trade deficit in goods is not that important for the U.S. economy.
- In 2017, the U.S. generated a net surplus of $345 billion from services and dividends and interest from financial assets. This yields a balance of payments deficit of $466 billion (2.4% of GDP), paid for mostly by foreign investment in US assets.
Without such investments, interest rates would be much higher.
- Since reported trade information between two countries comes from final sales rather than the value added by each country, it doesn’t reflect each country’s contribution. For example, the U.S. balance of trade deficit with China would be reduced by roughly 50% if calculated in value added terms.
- Furthermore, the majority of all goods imported to the US are either equipment or industrial supplies. These are critical to domestic companies’ generation of income and jobs.
- Finally, US employment has tended to increase as imports rise, and the growth of the US economy has tended to be higher as the trade deficit in goods rises.
The objective of trade policy should be to increase the economic well-being of a country’s residents including those who lose jobs or income in the process. This can be best achieved by using domestic resources as efficiently as possible. Neither the balance of trade nor payments yields enough information for effective public policy.
Of course, efficient resource use changes employment and purchasing; thus, in most cases, American producers or consumers should purchase goods from another country if they offer greater value. Trade, however, can have negative consequences, such as increased pollution or use of indentured labor, which should concern policy makers. President Trump chose to withdraw from the Trans-Pacific Partnership treaty which included provisions to inhibit these effects.
Exports are not necessarily good nor imports bad for a country’s economic well-being. Trade deficits can be bad if they induce consumption to grow faster than income, thus, increasing the chances of an economic crisis. Trade deficits can be good if they enable a country to increase productivity and, thus, the standard of living for its residents. Productivity improvements take time, and the net gains from trade should be shared with those who, as a result of such trade, lose employment or income. These consequences, however, should not be treated any differently from those generated by technological change, which causes many more people to lose employment and income.
Trade deficits are neither good nor bad. Public policy focused expressly on trade deficits, whether with specific countries or in total, is likely to lead to reduced not increased economic well-being. For Argentina, which consumes well beyond its economic means, trade deficits are bad; for the U.S., the effects are much less clear. Thus, it is best to follow the Hippocratic idea: “first, do no harm.”