“We have trade deficits with everybody”

Thus spake the Mr. Trump, on a day that the October trade figures were released, indicating a deteriorating balance.


Figure 1: US trade balance, in billions $, seasonally adjusted (blue). NBER defined recession dates shaded gray. Source: BEA/Census via FRED, and NBER.

He continued:

“Virtually every country in the world we have trade deficits with. And that’s going to be changing —it’s already changing — but it’s going to be changing fast,” he said.

He’s right. If the tax cuts go through, the deficits are going to get larger, despite any protectionist measures that Mr. Trump might implement. Michael Klein and I make this point in our newest Scholars Strategy Network brief:

Trump administration errors in basic economic thinking could very well produce bad effects. Efforts to reduce U.S. trade deficits by taxing imports – such as imports of finished products from China – would force American consumers to pay higher prices and could also hurt U.S. companies that depend upon imported inputs. These policies are also likely to lead to retaliatory trade policies from countries like China. Efforts to reduce overall trade deficits, in the mistaken view that these contribute to a drag on the economy, could also derail growth. It is also important to note that some of the Administration’s proposed policies, such tax cuts and increased private sector investment, would likely lead to growing trade deficits, setting up conflicts among the competing tactics of an Administration that often fails to understand economic complexities.

See also Brad Setser’s assessment.

17 thoughts on ““We have trade deficits with everybody”

  1. pgl

    “Efforts to reduce U.S. trade deficits by taxing imports – such as imports of finished products from China – would force American consumers to pay higher prices and could also hurt U.S. companies that depend upon imported inputs. These policies are also likely to lead to retaliatory trade policies from countries like China.”

    Yes but also add the very likely possibility that trade protection will also lead to dollar appreciation which hurts exports. And then there is that tax cut for rich people which would lower national savings and very likely lead to even more dollar appreciation.

    Reply
  2. PeakTrader

    “Trump administration errors in basic economic thinking could very well produce bad effects.”

    So far, Trump’s strategy has created a bargaining chip, boosted U.S. exports, and shored-up voters in the Rust Belt.

    What would happen if an export-led economy, like China, loses the biggest consumer market in the world?

    It would harm China much more than the U.S.. Foreign policy is often a game of poker than chess.

    Reply
  3. pgl

    “Trump’s strategy has created a bargaining chip, boosted U.S. exports”.

    Let’s put a few numbers to your latest spin. Sure real exports are 6.9% higher as of 2017QIII ($2193 billion) as compared to 2014QIV ($2151 billion) but that % increase pales to the 33.6% rise from 2009QI to 2014QIV.

    Trump told us to expect 4% per annum growth but real exports are growing at a clip less than 3% per year. But Peak Trader sees this as a significant “boost”. Seriously?

    Reply
    1. PeakTrader

      Nice try, of course, exports will rebound sharply from the trough of a deep recession. That doesn’t take away the leverage Trump created and uses.

      Reply
  4. pgl

    “What would happen if an export-led economy, like China, loses the biggest consumer market in the world?”

    They would sell more to other nations including North Korea. Of course American consumers could then subvert the Trump quotas on goods by buying from these other nations. I’m sure the North Koreans would love to profit from all of this at our expense.

    Reply
          1. Menzie Chinn Post author

            PeakTrader: Going beyond Wikpedia, I’d say in my humble opinion as an amateur historian, no successful rebellion in China has taken place without the peasantry/rural populace siding against the power center. A rebellion driven by urban interests could happen. Pigs could one day fly, too.

      1. macroduck

        Is there a latin expression that means “argument by making things up”?

        China’s economy would collapse? That’s just made up.
        Household final demand accounts for nearly half of Chinese GDP. Gross capital formation accounts for another 38%. The US doesn’t even account for all of China’s exports, by a considerable margin. The US could disrupt Chinese growth for a while, if the US is willing to do the same to US growth. China’s collapse is beyond the power of US policy, other than military policy. That, too, would come at enormous cost to the US.

        Trump has created a bargaining chip? Made up.
        Trump created and uses leverage? Made up.
        Boosted exports? Really? All by his vocal self? How does that work? Sounds made up.

        Actual economic analysis is, more or less by definition, not the same as partisan wishful thinking. Why don’t we talk about economic analysis.

        Reply
        1. PeakTrader

          Obviously, you can’t believe Trump is possibly that smart. China, which is a smaller economy than the U.S. in dollars, exports over $460 billion annually to the U.S., while the U.S. exports less than $120 billion annually to China. A trade war will have a much greater impact on China’s GDP, along with employment (including the multiplier effect).

          Reply
        2. 2slugbaits

          Is there a latin expression that means “argument by making things up”?

          Yes: argumentum ab mendacem

          I had to reach back to my old Wheelock textbook. “ab” is the preposition “by” and “mendacem” is the ablative declension of the adjective gerund form of “mendax” meaning mendacious.

          Reply
  5. Erik Poole

    Trade war! Trade war! Trade war!

    When it comes to War, Americans have a clear comparative advantage that needs to be pursued. Military occupation, drones, fighter-bombers, sanctions, trade wars. In the ‘Us and Them’ narrative, ‘they’ supply the victims, and ‘us–the Americans’ supply the punishment.

    Some dumbass hockey player getting cross-checked into the boards from behind — that’s boring. A full blown trade war would be so entertaining, it is guaranteed to garner HUGE ratings.

    Reply
    1. PeakTrader

      Trade Wars go on all the time. For example, China gets to exploit its labor and environment for an advantage. Here’s another example:

      “China’s recent development of a commercial airliner is a good example of the declining importance of IP theft. China’s old Soviet-supplied aircraft factories made shoddy aircraft. When China opened its market, Western firms rushed to sell it aircraft, and part of the requirement for market access was coproduction, where Chinese companies worked with Western aircraft firms to make parts for Western commercial aircraft. Coproduction, over 20 years, taught Chinese companies essential production know-how, and the quality of Chinese aircraft has improved markedly. Most of this transfer did not involve IP theft. The problem now is not that China wishes to build commercial airlines, it is that China will be tempted to use subsidies, pressure on domestic airlines to buy Chinese, and barriers to foreign companies to give their manufactures an edge in China and in the global market.“

      Reply
      1. PeakTrader

        Ironically, U.S. trade with China has been a greater net benefit to the U.S. than China, because China’s economic policies are so costly. However, the U.S. can benefit even more exporting additional amounts of high-end manufactured goods to China, which China cannot compete with even with intellectual property theft.

        Reply

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