Here’s a particular embarrassment for President Trump: After crusading for two years about the need to lower the nation’s trade deficit, the gap between exports and imports hit the highest level in a decade during Trump’s second year in office.
This isn’t terrible news, in itself. The United States has run a trade deficit every year since 1975, and it fluctuates in size based on a variety of factors. From 2017 to 2018, the trade deficit in goods and services rose from $552 billion to $621 billion, a 13% increase. Here’s the trend since 1992:
This wouldn’t be big news, except for one thing: Trump made a campaign promise to lower the trade deficit, insisting (against economists’ advice) that it would help create more American jobs. As president, he spent 2018 putting tariffs and other protectionist trade policies in place, in order to achieve that goal.
Since reality has produced the opposite of what Trump intended, the president has set himself up for criticism he deserves. But we shouldn’t bash Trump for a rising trade deficit. His real mistake was establishing the wrong goal in the first place.
The trade deficit doesn’t really matter all that much. There are genuine problems with trade, but they’re not reflected in the gap between imports and exports. Globalization has hurt some American communities, because lower-skilled manufacturing jobs have migrated overseas, and in many places been replaced by nothing at all. One policy mistake of the last 30 years or so has been relying on the free market to create new jobs for people displaced from obsolete ones. In too many cases, that hasn’t happened, and weak safety-net programs such as “trade adjustment assistance” have failed millions of Americans enduring legitimate economic hardship.
Trump wants to address this very real problem by turning back the clock and bringing back assembly line jobs of the 1970s. He calls himself “Tariff Man” and praises smokestack industries such as steel and coal mining. We need those industries (though increasingly less), but the only policies that will protect employment from technological innovation and better efficiency are terrible policies that essentially block progress and invite nations such as China to leapfrog America.
Help left-behind workers
Better policies would focus on aggressive ways to help workers left behind get the new skills employers need today, and go where the jobs are. There should be strong incentives for thriving companies to augment offices in boom zones like the east and west coasts with facilities in disenfranchised places like parts of Appalachia and the Rust Belt. Government aid should be better targeted as a last-resort backstop to help the hardest-hit communities.
This is complicated and fixes aren’t easy. It starts with better public schools and curricula geared toward the digital economy. Cities and states must play a role. Governments must create incentives for companies to care about thriving communities and long-term job creation, without punishing profits. All of these parties have to put aside political differences and cooperate.
Except for a few small-scale efforts, Trump hasn’t proposed anything like this. He rallied support as a candidate in 2016 by characterizing China and Mexico as villains “raping” the United States on trade, while pushing down living standards for the “forgotten men and women of America.” It was a bogus story then, but Trump has stuck with it, and now that he’s president, he has to explain why he can’t fix a problem he mischaracterized from the start.
Persistent trade deficits
The United States has persistent trade deficits because we spend most of our money and buy more than we can make domestically. This isn’t a “loss,” as Trump says. We pay dollars for products from China or Mexico or Canada, and are usually satisfied with the transaction. Other countries buy our stuff too, just not as much.
The trade deficit ballooned in 2018, for two reasons that have nothing to do with Trump, and two reasons that do. Economies outside the Unites States are slowing down, so they’re buying fewer American exports. And Federal Reserve interest rate hikes pushed the dollar modestly higher in 2018, making U.S. exports costlier and imports cheaper. There’s nothing Trump could have done about those factors.
But the tariffs Trump unilaterally imposed on roughly $300 billion worth of imports last year also contributed to the widening trade gap, because of retaliatory tariffs other countries placed on U.S. products. That was yet another force pushing U.S. exports down. And the soaring federal deficit that resulted from the 2017 Trump tax cuts forced the Treasury to issue more debt, which led to rising interest rates and a stronger dollar. Trump’s fingerprints are on both of those moves.
If Trump would stop caring about trade deficits, he’d be in a better position to focus on real problems with trade, such as the harm caused by globalization and legitimate trade abuses by China. But he’s stuck fighting for a bad campaign promise he’ll probably never be able to fulfill. If he keeps fighting reality, he’ll keep losing.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman