By William Reinsch
The trade deficit figure for all of 2016 arrived earlier this month, which provides the annual opportunity to think for a few moments about what it means. The deficit was $502.3 billion, an increase of less than 0.5% from the previous year. That number was reached via declines in both exports and imports, but exports declined slightly more — down $51.7 billion from 2015 while imports were down $49.9 billion. In addition, the trade deficit with China was also down — from $365.7 billion to $347.0 billion — a decrease of a bit more than 5%. Unpacking that a bit more, it appears the deficit in trade in goods was actually down slightly ($12.5 billion), but the services surplus declined by more ($14.4 billion), so there was a small increase in the overall deficit. The deficit is also down significantly from the all-time record of $762 billion in 2006, which means it has shrunk as a percentage of GDP from the 2006 peak of 5.5% to last year’s 2.7%.
This is both good and bad news. The good news is that the deficit overall has been declining from its peak, particularly as a percentage of GDP. While some of that is probably due to the Obama administration’s efforts to persuade some trading partners to pursue more domestic growth-oriented policies, the bad news is that it is also related to the overall slowdown in global growth. The U.S. simply has not recovered from the Great Recession to the extent we would like, and neither have most other countries. Some of it is also no doubt due to the decline in oil prices combined with increased domestic production, which is good in and of itself but ancillary to the question of our national competitiveness in a global economy.
Of course, most economists will tell you that the trade deficit doesn’t really matter by itself — it is more an indicator of excess consumption over savings, a matter best addressed by domestic fiscal and monetary policies. It is also an indicator of America’s unique place in the global economy. Not only is the dollar a reserve currency, but it appears we are also a reserve market — the destination for exports from countries around the world who are pursuing export-led growth strategies. Despite all the foreigners’ complaints about our trade laws or our protectionist actions, we have remained in good times and bad one of the most open economies in the world, and also one based on rule of law and relatively free of arbitrary government actions. The result has been that our openness has helped lift millions of people in other countries out of poverty. Those of you who believe in American exceptionalism ought to file that one away for future use. It’s not fashionable to talk about it in the current environment, but fifty years from now we will be proud of it — and historians will write about it.
However, that is the long-term, and as I wrote a couple of weeks ago, life compels us to deal with short-term realities, one of which is the administration’s belief that trade deficits are not only evil but are the source of most of our economic problems. Peter Navarro, head of the new National Trade Council, recently said, “We want to eliminate the trade deficit within a year or two…That’s very doable with good deals.”
More interesting are some recent comments by incoming Commerce Secretary Wilbur Ross at his confirmation hearing: “I view the other countries with whom we have a trade deficit as our vendors…While you need to treat the vendors with respect, they must also treat you as their largest customer, both with respect and most importantly playing by the rules of the road.” This and other statements by Mr. Ross are nineteenth century mercantilism and neo-colonialism at their best. Other countries are to supply us with raw materials so we can manufacture stuff to sell back to them. Gladstone, or Churchill for that matter, could not have said it better.
This was a successful policy in the nineteenth century, but the world has moved on, as have we in our post-war rejection of protectionism and decisions to engage the world and compete globally. Trying to restore those old days — which were not as good as we remember them — will be enormously disruptive to the network of global value chains that have been built up, and, more important, won’t solve the alleged problem.
To do that we need to sell more — something the administration has not talked about much — and buy less and save more, which is a matter for domestic policy more than trade policy. Normal policies to force that would reduce demand, and therefore reduce growth and increase unemployment, which is not what we need or want. The trade deficit went down significantly during the Great Recession, but I don’t think that’s an episode we want to repeat. Instead, it appears the Trump administration wants to stimulate demand but confine it to domestic sources via protectionism. This would cripple supply chains even further and in some sectors push companies to simply import and pay the tariff rather than try to reconstruct a domestic manufacturing capability. In other words, it is a lose-lose strategy that will cost our manufacturers a lot of money and make them less competitive globally without significantly reducing the trade deficit.
A smarter approach would be to recognize the reality of a global market and help our companies compete more effectively in it — instead of trying to turn back the clock.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.