Outside the Beltway

Trade Deficit Hits Record Levels Despite Trump’s Tariffs

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

Doug Mataconis · Friday, March 8, 2019 · 18 comments

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.