The Trade Deficit

[carpedm9587]

I was reading through this article about the nature of the partisan divide in the U.S. today, when I ran across a little tidbit I found fascinating. For all of the trade war and economic positioning, the trade deficit is on track this year to set a record for the largest trade deficit ever.

Trump makes a big deal of this, and it is certainly rallying his base, but most economists I am finding just yawn. The U.S. is host to almost 1/3 of the wealth of the world. We are the biggest consumer in the world, by far. And we simply cannot (and do not) produce everything Americans want domestically, especially when labor is so vastly more inexpensive in developing countries, and the largest part of most company's expenses is payroll. Put all of that together, and we will inevitably have a trade deficit, and it is not a "bad" thing.

Now, if there are parts of the trade deficit that are being fueled by inequitable trade practices, THAT needs to be addressed. But Trump is not telling the whole truth (no big surprise). For country's to have different tariffs for the same product is simply "business as usual." Tariffs are typically imposed for one or both of two reasons: to raise revenue (believe it or not, before we had income tax, most federal government functions were paid for using tariffs), or to protect an industry/product from competition. There are some products for which U.S. import tariffs are higher than import tariffs of other countries, others for which import tariffs of other countries are higher than import tariffs imposed by the U.S., and some where they are the same. The same is true of export tariffs.

As with so many things, the message "plays well politically," but has little/no substance when you actually look at the issue.

[Cow Poke]

Years ago, when I used to listen to Rush Limbaugh, he had a guest host occasionally named Walter Williams. Williams would talk about the trade deficit, and - yeah, a big yawn.

He would point out things like "I have a HUGE trade deficit with my local grocery store - they don't buy ANYTHING from me....."

[mikewhitney]

I wonder if the use of import tax for US revenue was similar in principle to a luxury tax. It seems that the items imported would not be the daily essentials but would be designer brands, unique furniture, fine spices, etc...

In this way, the extra cost of such goods would only affect those who could afford these fineries.

[Cow Poke]

The luxury tax, domestically, was a disaster. It simply caused luxury yacht builders, for example, to take their factories elsewhere, and still sell yachts.

[carpedm9587]

Years ago, when I used to listen to Rush Limbaugh, he had a guest host occasionally named Walter Williams. Williams would talk about the trade deficit, and - yeah, a big yawn.

He would point out things like "I have a HUGE trade deficit with my local grocery store - they don't buy ANYTHING from me....."

Exactly. I have a trade deficit with my dentist too. Indeed, most of us have trade deficits with some, and surpluses with others. The important question is, do we operate overall in "deficit" mode or in "surplus" mode. Since American wealth is growing at a faster rate than the overall trade deficit, trade deficits are not a problem. There are four fiscal areas I think the federal government should be focused on:

1) Trade imbalances that are due to improprieties (e.g., the intellectual property issues with China). I give Trump a B on this.
2) The government's budget deficit issues. I give Trump and F on this.
3) The government's inefficient use of tax dollars. I give Trump a D on this.
4) The overall wealth imbalance in our country. I give Trump an F on this.

[Reepicheep]

One of Trump's election promises was that he would eliminate the US trade deficit with other countries. July trade data was just released, so we can examine just over three and a half years of trade data, to see if Trump has kept his promise.

The US goods trade deficit with the rest of the world for recent years:

-$735 billion 2016 - last year Obama
-$792 billion 2017 - 1st year Trump
-$872 billion 2018 - 2nd year Trump
-$854 billion 2019 - 3rd year Trump
-$479 billion 2020 - 4th year Trump, first 7 months of year

Using 2016 as a benchmark, the yearly increase in the goods trade deficit is:

-$57 billion 2017
-$137 billion 2018
-$119 billion 2019
-$65 billion 2020 (first 7 months 2020 compared to first 7 months 2016)

-$378 BILLION, TOTAL INCREASE IN TRADE DEFICIT UNDER TRUMP

One of Trump's first acts as President was to start a trade war with virtually every US trading partner. This strategy proved to be a disaster, since all this did was unite all US trade partners against the US. This made it impossible for Trump to, for example, get any other countries to join in Trump's trade war with China.

Trump and his supporters also decided that, by telling lies about the United States' closest allies, the US trade situation would somehow improve. For example, Trump called Mexicans drug dealers, criminals, and murderers, and demanded that Mexico give him tens of billions of dollars so he could build his wall. Trump insulted all Canadians by calling us a security threat, then for good measure he released a religious fatwa where he cast Prime Minister Trudeau into hell, because Canada responded to Trump's tariffs by imposing countervailing tariffs on US imports.

Canadians and Mexicans won't be forgetting these insults for a long, long time. It will likely be many years before the US trade deficit with Canada and Mexico recovers to where it was under Obama.

The evidence so far indicates that Trump is losing his trade wars, and losing badly.