Trade Deficit Hits Record Levels Despite Trump’s Tariffs

Notwithstanding President Trump's tariffs, America's trade deficit hit a record level last year.

 

Despite the President’s trade war and his promise that increased tariffs would benefit American manufacturing, the latest statistics make clear that the U.S. trade deficit actually increased to record levels in 2018:

WASHINGTON — The United States imported more goods than ever last year, including a record amount from China, ballooning America’s trade deficit with the rest of the world to $891.3 billion and delivering a setback to President Trump’s goal of narrowing that gap.

The increase was driven by some factors outside Mr. Trump’s control, like a global economic slowdown and the relative strength of the United States dollar, both of which weakened overseas demand for American goods. But the widening gap was also exacerbated by Mr. Trump’s $1.5 trillion tax cut, which has been largely financed by government borrowing, and the trade war he escalated last year.

The trade deficit is the difference between how much a country sells to its trading partners and how much it buys. Mr. Trump has long boasted that his trade policies would reduce that gap, which he views as a measure of whether partners like China and the European Union are taking advantage of the United States, a diagnosis that few economists share.

Instead, in a year when Mr. Trump imposed tariffs on steel, aluminum, washing machines, solar panels and a variety of Chinese goods, the trade deficit grew by 12.5 percent from 2017, or nearly $70 billion dollars, the Commerce Department said Wednesday. The deficit in goods, which Mr. Trump particularly targets, grew to $891.2 billion for the year, its highest level in history.

In December, the overall goods and services deficit rose to $59.8 billion, up 19 percent from the previous month. It was the highest monthly trade deficit in a decade.

The United States also imported a record amount of goods from China last year, despite Mr. Trump’s trade war with China and the imposition of tariffs on $250 billion worth of Chinese goods. The trade gap in goods between the United States and China hit $419 billion in 2018, deepening a bilateral deficit that has been a particular source of anger for Mr. Trump.

The widening gap appears to reflect uneven results from the administration’s trade war with Beijing.

American exports to China declined, falling by nearly 50 percent in December, compared to the same month a year before. American companies that sell products in China were hurt by a slowdown in the Chinese economy and retaliatory measures that Beijing has leveled on American goods to counter Mr. Trump’s tariffs. A stronger American dollar and a weaker Chinese yuan also offset some of the impact of Mr. Trump’s tariffs.

Mr. Trump views the trade deficit with China as a sort of economic scorecard for which country is on top. Most economists disagree with this perspective, viewing trade deficits as neither a sign of economic strength nor weakness, but a function of macroeconomic factors like investment flows, fluctuations in the value of currency and relative growth rates.

As the trade deficit widens, Mr. Trump’s focus on it has resulted in a particular irony: By his own metric, the president is failing to right America’s global trading relationships. Yet many of the president’s critics don’t blame him for this, saying some fluctuations in the trade deficit are largely beyond his control.

Jennifer Rubin comments:

President Trump doesn’t understand that the trade deficit is not an accounts payable that the United States must settle by writing a big check. He insists money is being “taken out” of the United States. That’s just wrong. It’s also wrong to assert that a big trade deficit means high unemployment or a rotten economy. In fact, Trump has proved as much.

(…)

Maybe Trump will go back to German Chancellor Angela Merkel for one more tutoring session on trade. When we purchase more German or Chinese or whoever’s goods than they purchase of ours, they have a whole lot of U.S. dollars — which they use to invest in our economy, create jobs and generate more wealth. No matter how many times Merkel points to German plants in the U.S. producing cars and employing Americans, Trump doesn’t get it.

For all of the tariff wars and fights with allies, Trump didn’t even accomplish his goal. But he did inflict pain on farmers (who now require billions in taxpayer subsidies) and increase costs for American consumers, including U.S.-based businesses that rely on foreign suppliers. In sum, his entire trade policy has failed and has in fact been counterproductive. He set out to fix a non-problem (a trade deficit) and created real ones including international conflict, higher consumer prices and gross inefficiency in our economy when certain businesses have lobbying clout to get tariff exemptions and others do not.

Republicans in Congress have been too timorous to claw back tariff power to stop this economic idiocy. And too many Democrats have been on the protectionist bandwagon to credibly criticize Trump.

Here’s an idea: Republican presidential primary challengers and Democratic contenders should go after Trump for hurting Americans. What’s he got against hard-working farmers, middle-class consumers struggling to buy a washer and dryer, and American car companies who have to pay extra for steel and aluminum, which, in turn, gets passed on to consumers? Trump may think he’s winning, but he’s apparently too dim to realize Americans are losing.

As nearly any economist on either side of the political aisle will tell you, the trade deficit is, in and of itself, a meaningless number. While Trump and other trade protectionists claim that a trade deficit is an indication that money is being “taken out” of the U.S. economy, the truth is that it isn’t nearly as important as the protectionists would have you believe. In the end, the trade deficit is the gap between how much the United States imports in good and services and how much it exports. However, the fact that we have a deficit with the world as a whole or with a specific country such as Mexico or China does not mean that we “lost” money to those nations as President Trump and his protectionist supporters would have you believe. The primary reason for this is that the same international trade that results in a trade imbalance also brings things of value to the importing nation that, presumably, consumers and businesses value more than the cash that was sent overseas or across the border.

In the case of China and many other nations, for example, we get less expensive consumer goods and other items. Saying that we have a “trade deficit” with China because we give them money and they send us consumer goods like iPhones and other things makes no more sense than saying I have a “trade deficit” with my local grocery store because they give me food I want in exchange for pieces of paper with pictures of Presidents on them. Additionally, trade deficits are influenced by a number of factors that have nothing to do with international trade itself, such as the rates of economic growth in the two countries, currency valuation, and the rates of saving and investment. Finally, a reduction in a “trade deficit” isn’t necessarily a good thing. For example, our trade deficit shrunk significantly during the Great Recession due to the fact that consumer demand and spending were both negatively affected, but nobody seriously suggests that we should throw the economy into a recession so we could have a lower “trade deficit.”

Despite all of this, President Trump has focused repeatedly on the “trade deficit” as a measure of the success of his trade policies and has insisted that his higher tariffs would bring about lower trade deficits and economic growth. In some sense, though, these two goals are arguably contradictory since higher economic growth is likely going to lead to increases in consumer and business spending, including increases in spending on items that originate overseas and thus lead to increases in the “trade deficit.” In any case, while Trump has claimed in recent speeches that the “trade deficit” was increasing, these numbers tell us the exact opposite. Therefore, the only conclusion we can reach is that Trump’s trade policies have been a failure.

All of this began, of course, just over a year ago when the Trump Administration announced aluminum and steel tariffs that, at the time, were primarily aimed at China and a handful of other nations while exempting, for the time being, allies in Europe as well as Canada and Mexico. Not surprisingly, that announcement was received negatively on Wall Street, which until then had been largely headed upward, on fears that we were witnessing the beginning of a trade war that threatened to undo much of the progress that had been made on international trade since the end of World War Two. Several weeks later, the President announced a series of new tariffs on China, which quickly led China to announce retaliatory tariffs of its own, many of them aimed at industries such as agriculture that had been heavily pro-Trump in the 2016 election. Several days after this announcement, Trump said that the United States was considering additional tariffs against the Chinese amounting to as much as $100 billion dollars. The Chinese Trade Ministry quickly responded to these statements from the President, saying that “We do not want to fight, but we are not afraid to fight a trade war.” Indeed, as Steven Lee Myers noted when these statements were made, the Chinese are confident that they could win a trade war.

For example, just two months after the steel and aluminum tariffs were announced, The Wall Street Journal reported that prices for both foreign and domestic steel and aluminum were increasing and this was having a negative impact on manufacturers that rely on these raw materials for their products. Other reports have indicated that American pork farmers were increasingly nervous about their overseas business with nations like China due to the fact that Beijing was threatening to hit American agriculture with retaliatory tariffs. In Iowa, it was reported that Chinese retaliation for the tariffs could cost soybean farmers $624 million this year alone, with the prospect of larger losses if the retaliation continues beyond this year. This has led many leaders in Iowa and elsewhere, including Senator Chuck Grassley to express concern about the impact of the trade war on Republican fortunes in the fall. This is especially true given the fact that the tariffs seem to be expressly targeted toward Trump voters and middle-class Americans. In the time since then, we have also seen that the tariffs have had a negative impact on other American businesses, and has even led an iconic American brand like Harley-Davidson to announce that they are moving some production overseas in response to the retaliatory tariffs imposed by the European Union. Most recently last month Trump announced a new round of tariffs on Chinese goods and the Chinese responded immediately with another round of retaliatory tariffs.   impossible to completely shield Chinese companies and consumers from the full impact of a trade war. Most recently, of course, the President slapped another $200 billion in tariffs on Chinese goods, and the Chinese responded with retaliatory tariffs of their own.

As if this wasn’t bad enough, the President saw fit to expand his trade war and, this time, he aimed his fire at the most illogical targets of all, our closest allies and trading partners. At the end of last May, the President announced that he was revoking the exemption from the steel and aluminum tariffs that had been announced back in March that applied to American allies in Europe as well as Canada and Mexico. Seemingly bizarrely, the president claimed that this was being done for “national security” reasons. Objectively speaking, of course, the idea that these allies are a national security threat to the United States, or that we could not rely on them as a source for aluminum and steel in the event of a national emergency or military threat is absurd, but because of the way American law and applicable trade treaties are worded “national security” is the only ground available to the President to impose tariffs without having to seek Congressional authorization and without violating the applicable treaties. Needless to say, this didn’t go over very well with our allies in Europe and elsewhere. Canada’s Foreign Minister called the new tariffs “absurd,” for example, and European Union officials announced retaliatory tariffs against American goods. Things got even more bizarre in this regard as Trump exchanged harsh words with Canadian Prime Minister Justin Trudeau prior to the G-7 Summit. Once he was at the summit, Trump essentially did everything he could to alienate America’s closest allies, thereby seemingly achieving a goal that Russia and, before it, the Soviet Union had only dreamed of, driving a wedge between the United States and its allies. After the Singapore Photo Op Summit, Trump continued his tirade against Trudeau, while polling revealed that Canadian public opinion about the United States was suffering as a result of American actions and the President’s rhetoric. Finally, it was reported at the same time that the President was considering what would effectively be a ban on German-built luxury automobiles. While some of these tariffs have been removed since they were imposed, the vast majority of them remain in place and, as the Times article linked above notes, they are continuing to have a negative impact on the economy. Additionally, the tariffs have had a negative impact on other American businesses and has even led an iconic American brand like Harley-Davidson to announce that they are moving some production overseas in response to the retaliatory tariffs imposed by the European Union.

As I have noted before, President Trump once famously claimed that  “trade wars are good and easy to win,”  and he apparently continues to believe this nonsense notwithstanding more than two centuries of economists dating back to Adam Smith and including economists today on both the left and the right who agree that the kind of protectionism this President is pursuing is ultimately self-destructive. Now, we’re all beginning to pay the price for his ignorance.

 

FILED UNDER: Donald Trump, Economics and Business, International Trade, Politicians, US Politics, ,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Mikey says:

    President Trump doesn’t understand

    One could stop there and be correct 100% of the time.

  2. Kylopod says:

    I can imagine what the debates will be like.

    DEM NOMINEE: Under President Trump, who promised to bring the trade deficit down, it has soared to record levels. [Cites statistics.]

    TRUMP: Fake news! We have the greatest trade surplus in history!

  3. Daryl and his brother Darryl says:

    President Trump doesn’t understand

    Here is the deal…the guy is as dumb as a box of rocks.
    And if you don’t think so…then you are dumber than a box of rocks.

  4. Teve says:

    Trump is as ignorant on economics as he is on virtually every other subject. He thinks that if you reduce the trade deficit, you’ll also reduce the budget deficit. Indeed, that was his whole plan to pay off the federal debt, which he said he could do in 8 years, to renegotiate our trade deals and reduce the trade deficit. Even those who have taken a high school economics class knew this was pure folly, but not Trump. So instead of reducing the trade deficit, he’s increased it to record levels. And instead of eliminating the budget deficit and paying down the national debt, he’s sent it soaring and added trillions to the debt.
    This is what happens when you elect a walking example of the Dunning-Kruger effect to office. He thinks he knows everything when he actually knows nothing and he refuses to listen to actual economists who would tell him how wrong he is.

    -ed brayton

  5. DrDaveT says:

    Because facts do matter, I have to ask: has the Commerce Department yet fixed the accounting problem that fails to count software sales (especially as a service) as part of the trade balance? If not, shifting economic activity into software (and exporting it) will exaggerate the trade deficit.

  6. Daryl and his brother Darryl says:

    OT…
    So far the Jane Mayer piece has driven Bill Shine out of the White House and convinced the DNC to drop Fox News.
    Not bad for fake news.
    https://www.outsidethebeltway.com/fox-news-and-the-trump-presidency-state-run-media-or-a-media-run-state/

  7. Sleeping Dog says:

    Krugman this morning

    In the Trumpian universe, trade deficits happen because we made bad deals — we let foreigners sell their stuff here, but they won’t let us sell our stuff there. So the solution is to throw up barriers to foreign products. “I am a Tariff Man,” he proudly proclaimed.

    The reality, however, is that trade deficits have almost nothing to do with tariffs or other restrictions on trade. The overall trade deficit is always equal to the difference between domestic investment spending and domestic saving (both private and public). That’s just accounting.

    The reason America runs persistent trade deficits isn’t that we’ve given away too much in trade deals, it’s that we have low savings compared with other countries.

    He goes on to explain why tariffs don’t do what Trump thinks they do.

  8. Slugger says:

    To a large extent, I think that presidential influence on the economy is exaggerated; largely no matter who sits on the throne the harvest depends on the weather not the king. Also, I agree with Dr. Krugman that trade deficits are not purely bad. However, I have always had a negative balance with the Isle of Islay which has worsened dramatically in the last two years, and Trump is definitely at fault!

  9. Kathy says:

    @Sleeping Dog:

    I don’t understand the relationship between savings an investment on one hand, and trade deficit on the other. I suppose it means that money doesn’t stand still, so if you don’t save or invest it, then you spend it.

    I am willing to accept it regardless, because most reputable economists say it is so, but I keep some reservations.

    @Kylopod:

    Of course. His peeps believe the wall is being built, though not one dollar has been spent on it, and even the “prototypes” have been taken down. He can tell them it’s raining soup, and they’ll go out with bowls and spoons.

  10. Dave Schuler says:

    The WSJ’s take is that the increase in imports is the inevitable consequence of the substantial capital inflows that have taken place in the U. S., themselves the consequence of slow economic activity and unsettled circumstances elsewhere. My own view is that the increased globalization of the last 30 years means that the more economic growth here, the more we’re likely to import. Both could be true.

  11. de stijl says:

    @Kathy:

    He can tell them it’s raining soup, and they’ll go out with bowls and spoons.

    More likely colanders and forks. These are not the brightest bulbs.

  12. de stijl says:

    Trump got an economics degree from Wharton. The Wharton School should be very ashamed and abashed and perhaps rescind that (corruptly bought and paid for degree and in no way earned) degree.

    My financial adviser went to Wharton so I give him a quick jab about that every time I meet with him. I suspect but don’t know that he is a Joyner-type Republican voter or leaner, but he is also at heart a capitalist and knows bone deep that Trump’s trade wars and economic policies are idiotic and counter-productive and massively destabilizing. His vote is his own; it’s not my business or concern.

    During the Trump era, my best strategy is to hunker down and exit / massively hedge equities. I’m super okay with slow investment growth in return for relative safety for four years.

    2
    1
  13. Sleeping Dog says:

    @Kathy:

    I’m getting out of my depth here, but Krugman’s comment that it is accounting is the key. Money, goods and services come and go between nations and at the point in time when measured, any difference is treated as a surplus or deficit.

  14. Teve says:

    @de stijl: then when they don’t get any soup they blame gay liberal black Mexicans living in big cities on the coasts 😀

  15. Just nutha ignint cracker says:

    @Kathy: @de stijl: Either way, they’ll tell you it’s the best soup they’ve ever had. Much better than the soup during Obumma!

  16. The abyss that is the soul of cracker says:

    @de stijl: According to Wikipedia, the degree was a BS (no pun intended) in Economics.

    Yo mama you say? (And my irony meter pegged and caught fire, too.)

  17. Steve Verdon says:

    @Sleeping Dog:

    The reason America runs persistent trade deficits isn’t that we’ve given away too much in trade deals, it’s that we have low savings compared with other countries.

    Nonsense. That a foreigner wants to invest in the US does not necessarily mean that people in the US are not saving enough. This kind of reasoning from income accounting identities is always dubious, even when done by a Nobel Prize winning economist.

  18. Steve Verdon says:

    @Dave Schuler:

    The point is that the entire notion of the balance of trade is, as Adam Smith put it, absurd. Why anyone would care about it is not at all clear. Some argue we aren’t saving “enough” but what is “enough”…so that no foreigner is willing to invest in the US? Sounds rather…well…Trumpian. Why not just let people save as they see fit according to their circumstances.

    The only reason we look at the balance of trade is to do accounting for things like GDP. That is it. That the Chinese are selling us stuff we want to buy and then taking that money they got from selling us stuff and investing in the US economy…is bad how? Are they going to sneak Alabama off back to mainland China?