Q1/2022 -4.9%
2021 -4.0%
2016 -2.7%
2005 -5.7%*
* Highest on record; GDP stats begin in 1929. Deficits for 1815-1816 may have been higher, but GDP for those days is guess-work. In dollar terms, the 2016 deficit (goods/services) has grown by about 80%, from $481 billion; to a 2021 deficit of $861 billion.
The Trump administration’s first “President’s Trade Agenda” report, released in March of 2017, cited U.S. manufacturing trade balance data as an index of the failures of previous administrations:
“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 “President’s Trade Agenda” report of 2018 used “bilateral” trade balance to assert a failure of the North American Free Trade Agreement and set a goal for the “USMCA” which succeeded it:
“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.” … “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.”
The two assertions’ use of trade-balance data as a way to judge policies have well-known logical,* data,** and economic theory*** problems. This duly noted, how do they look on their own terms five years later? By 2021, U.S. exports had dropped from the 11.9% share of GDP they held in 2016 to 10.8%; imports, meanwhile, had grown a bit from 14.6% to 14.8% of GDP. Here then are the same two trade-balance statistics for 2021 and (very tentatively, based on one quarter’s worth of trade data) so far in 2022:
1. The U.S. manufacturing deficit in 2021 was $1.07 trillion. The last four months’ data suggest a 2022 total somewhere around $1.3 trillion. If this ends up about right, the 2016 manufacturing deficit noted in the 2017 “President’s Trade Agenda” would have doubled in five years.
2. The trade balance with Mexico (again, goods only) was $108 billion in 2021, a year after USMCA implementation. It looks likely to top $125 billion in 2022, with tariffs on Chinese consumer goods still shifting some purchasing of TV sets, auto parts, etc., to Mexico.
* The “post hoc, ergo propter hoc” fallacy.
** Comparison of nominal-dollar balance in 2000 to the nominal-dollar balance in 2016, unadjusted for inflation.
*** Global trade balance will always equal national investment minus national savings; if tax cuts and large fiscal-stimulus programs reduce savings, trade balances will automatically go into deficit unless investment collapses for some reason. So the 2017 comment is not a useful comment on trade agreements, and the 2018 objective likely not one achievable through policy.
Data
The Census Bureau’s U.S. monthly trade data, through April 2022.
… and the U.S./Canada/Mexico balances.
… and for the big picture, U.S. exports, imports, and balances from 1960-2021 on one convenient page.
What happened?
Trumpism leaves a larger deficit overall, and more concentrated in manufacturing than the 2016 figures. Why the jump?
Tax policy, followed by heavy COVID-era fiscal stimulus, are the obvious suspects. 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. With higher fiscal deficits, and without an offsetting rise in family or business savings, overall U.S. savings will fall. All else equal, the “savings – investment = trade balance” identity means higher trade deficits. The Trump-era tariffs, though not likely the cause of the overall deficit growth, have two likely balance effects:
(a) Shifting import sources: Imports from China, though above pre-tariff levels in dollar terms, were 21.6% of goods imports in 2016, and about 17% in 2021. With clothes, consumer electronics, etc., from Vietnam, Mexico, India, Taiwan, and so forth replacing about $100 billion in Chinese-origin goods, the higher USMCA deficit reflects this shift.
(b) Shifting sectoral composition: Trump-era tariffs on steel, aluminum, and Chinese goods are concentrated in industrial inputs such as metals, auto parts, electrical converters, etc. As U.S. manufacturers — automotive, machinery, beer and soda canners, tool-makers, etc. — absorb these costs, they are likely to lose some marginal competitiveness whether in exporting or competing against imports. This likely pushes more of the U.S deficit into manufacturing.
The two reports:
The 2017 “President’s Trade Agenda.”
… and the 2018 followup (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).
Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.
Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.
Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.
Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.
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