Experts Split on Trump’s View on Trade Deficit

As the nation was reeling from the racially charged violence in Charlottesville, Virginia, and the president's response, Donald Trump was quietly having one of his biggest weeks to date on trade.

On Monday, Trump announced plans paving the way toward a so-called Section 301 probe into Chinese intellectual property practices. And on Wednesday, Trade Representative Robert Lighthizer met with his Canadian and Mexican counterparts to begin retooling the North American Free Trade Agreement, USNWR reported.

Trump's trade efforts largely revolve around the ideas that the US should export more than it imports and that the country's $500 billion deficit should be turned around. But experts are split on the degree to which the America's deficit is bad for the economy–and whether Trump's actions will ultimately be able to close the country's yawning trade shortfall.

On a fundamental level, trade deficits do factor into gross domestic product calculations, as exports bolster GDP while imports drag. But more goes into GDP calculations than a nation's commerce balances alone. The US trade deficit was more than $321 billion smaller in 2009–the year America exited the Great Recession–than in 2007, when the downturn began.

"The current debate about trade deficits has been framed by the Trump administration, by their assertion that trade deficits are very important and damaging to the US economy, because they indicate jobs have been lost to overseas countries, foreign countries, largely because of unfair trade practices," Peter Allgeier, a former deputy trade representative and president of the Coalition of Services Industries, said during an event earlier this year hosted by the Washington International Trade Association.

Manufacturing & Jobs

And, indeed, there's an argument to be made that products that aren't made in the US and are imported could, in a more isolated world, be manufactured domestically and provide jobs. Examples of companies investing in operations outside of the US–where labor standards may be more lax and worker compensation is cheaper–serve to bolster the administration's positioning.

"Since US imports are concentrated in manufactured goods, a larger deficit translates into fewer manufacturing jobs. But deficits are only one part of the long-term manufacturing job loss," Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics and a former international trade and tax official at the US Treasury, said earlier this year in an explanatory trade video. "Labor-saving automation and information technology explain most of the decline in manufacturing jobs in recent decades."

Automation aside, there still isn't universal agreement that trade deficits are naturally indicative of job losses.

Patrick Newport, an economist and a director of long-term forecasting with research and analysis company IHS Global Insight, offered a similar assessment earlier this year. He described the idea that trade deficits kill domestic jobs as a "misconception" and one of his "pet peeves."

Newport instead points to what's called the country's current account deficit, which is a broader measure of trade flows that goes beyond the standard exchange of goods and services. That metric sat at $116.8 billion in the first quarter of 2017 and represented 2.5% of US GDP.

Combating Deficit

Caroline Freund, a senior fellow at the Peterson Institute for International Economics and former researcher at the World Bank, the International Monetary Fund and the Federal Reserve Board, opted to take a similarly holistic approach to trade during the Washington International Trade Association's event earlier in the year.

The Trump administration has expressed interest in combating America's trade deficit with individual countries like China and Mexico, but Freund argued that this is the "wrong approach." Instead, she said the administration should keep a tighter lid on government borrowing.  As Hufbauer points out, America is spending more than it's bringing in from trade, so "the United States must either borrow from foreign lenders or attract investment from abroad" to break even.

"The trade balance has almost nothing to do with trade policy," she said. "This is the wrong approach. A trade deficit is not about product-by-product bilateral trade, and that's not a good way to look at it."

Freund argues the primary concern isn't the individual deficit the US runs with an export-heavy country like China. It's the fact that the associated deficit is only going to put the government in a tighter fiscal spot.

She said, "If you really are concerned about the trade balance, it's important to not expand the fiscal deficit, because then the government will be absorbing more."