FACT:
The U.S. trade deficit is up ~60% since 2016.
THE NUMBERS:
$1.05 trillion*: U.S. manufacturing trade deficit, 2021
$0.90 trillion: U.S. manufacturing trade deficit, 2020
$0.65 billion: U.S. manufacturing trade deficit, 2016
* Educated guesswork for a volatile post-COVID closure period, based on 8 months of available data for 2021
WHAT THEY MEAN:
Each February, the Office of the U.S. Trade Representative puts out a report entitled “The President’s Trade Agenda,” meant to set out administration goals for the coming year. The 2017 edition, the first of the Trump administration, cited U.S. trade balance statistics as proof that early administrations got things wrong: “In 2000, the U.S. trade deficit in manufactured goods was $317 billion. Last year it was $648 billion — an increase of 100%.” The next one, in 2018, used “bilateral” trade balance to (a) claim failure for the North American Free Trade Agreement (“our goods trade balance with Mexico, until 1994 characterized by reciprocal trade flows, almost immediately soured after NAFTA implementation, with a deficit of over $15 billion in 1995, and over $71 billion by 2017”) and (b) define a goal for a renegotiated “USMCA”: “USTR has set as its primary objective for these renegotiations to improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.”
Few economists see trade balance as a useful way to judge trade policy, whether in terms of the content of agreements, or the nature of permanent systems like tariff schedules and antidumping laws. In the standard Econ 101 equations, a country’s trade balance will always match the difference between its savings and its investment; since the mid-1970s, Americans have been investing more than we save; ergo, deficits result. In this view, very high deficits can cause alarm as indicators of unsustainable booms and potential financial shocks, but the appropriate response is long-term measures to raise savings rates. Trade policy, meanwhile, should be judged against hopes for growth, job quality, control of inflation, raising living standards for low-income families, business competitiveness and innovation, and so on.
But shoving such high-minded quibbling aside, how do the Trump legacy policies — tariffs on metals and Chinese goods, withdrawal from the World Trade Organization’s Dispute Settlement Body, the new USMCA, etc. — look when judged by the standards the 2017 and 2018 reports set?
1. By 2020, the U.S. deficit in manufactured goods had hit $900 billion. This is a four-year jump of $252 billion, not much below the $331 billion 16-year increase cited in the 2017 report. Barring some unexpected economic shock this November, the 2021 figure will easily top $1 trillion.
FURTHER READING
Data:
Compare this data against the Census Bureau’s U.S. monthly trade data, through August 2021.
… and for the U.S. with Canada and Mexico, specifically.
… and for the big picture, U.S. exports, imports, and balances from 1960-2020 on one convenient page.
What happened?
Trumpism leaves a larger deficit overall, and more concentrated in manufacturing than the 2016 figures. The basic figures are, pulling the lens steadily back:
(a) The U.S. “goods” deficit — exports of manufacturing, energy, agriculture, scrap and waste and uncategorized small-scale shipments minus the equivalent imports — was $749 billion in 2016 and $922 billion in 2020. The manufacturing deficit was equivalent to 86% of the 2016 total, and by 2020 had risen to 98% of the total. A 2021 annualization suggests a total goods deficit around $1.05 trillion in 2021, with manufacturing more than 100% of the total and other goods in small net surplus.
(b) A broader measure, counting services trade (generally in surplus for the United States) as well as goods, finds a goods/services trade deficit up from $481 billion in 2016 to $677 billion in 2020. The 2021 figure is likely to be around $900 billion.
(c) Relative to GDP (more meaningful), a deficit of 2.7% of GDP in 2016 rose to 3.1% in 2020, and a likely 4% in 2021. This would be the highest since the modern-era peaks of 5.7% in 2005 and 2006.
Why the jump? Tax policy is the obvious suspect. Three of the four upward ratchets in U.S. trade deficits since the 1970s followed tax-cut bills — one in the first Reagan term, another in the second Bush administration, and the third in 2017. Bills of this sort bring higher government deficits. Unless a rise in family or business savings offsets this public dis-savings, overall U.S. savings will fall, and all else equal, by virtue of the “savings – investment = trade balance” identity, trade deficits rise. So the higher 2020 and 2021 deficits likely emerge from the 2017 tax bill.
The Trump-era tariffs likely had relatively little trade-balance impact, but do seem to have had two outcomes. One is a shift in import patterns: imports from China, though slightly above 2016 levels in dollar terms, have dropped from 21.6% of goods imports to 18.1% in 2020 and 2021, as clothes, consumer electronics, etc. from Vietnam, India, Taiwan, and so forth replace some Chinese-origin goods. Second, some shift in composition, with relatively more manufacturing deficits and relatively less energy. Where the permanent U.S. tariff system is mostly a way to tax clothing and shoes and so falls mainly on retailers and families, Trump-era tariffs on steel, aluminum, and Chinese goods were more concentrated in industrial inputs such as metals, auto parts, electrical converters, etc. As an example, tariff revenue on insulated electric conductors rose from $56 million in 2017 to $322 million in 2020. As U.S. manufacturers absorb these costs, the likely result is marginal loss of competitiveness both for exporters trying to sell to foreign buyers and for firms competing against imports at home (and of course exporters facing retaliation by foreign countries responding to tariffs), pushing more of the U.S deficit into manufacturing.
The two reports:
Read the 2017 “President’s Trade Agenda” report.
… and also read the 2018 follow-up (with a wildly wrong claim that the 2017 tax bill “has the potential to reduce the U.S. trade deficit by reducing artificial profit shifting”).
And so … “House on fire! Bring more kerosene!” In the Economist last month, Trump-era lead trade negotiator Robert Lighthizer again laments high trade deficit, skates around the 2017-2021 rise, and suggests more of the 2018-2020 approach will bring it down this time. Read the Economist piece here.
