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America’s Economic “Comeback” Owes No Thanks to Trump Trade Policies
In State of the Union Speech, Trump Credits Trade Policies Where No Credit Is Due
By Daniel Griswold
In his State of the Union address on Tuesday night, President Trump touted the strong US economy and low unemployment rate, claiming credit for a “great American comeback” driven in significant part by his trade policies. The president was right about the general health of the US economy, but not about the role of his trade policies.
In his address, the president took credit for replacing what he called the “the disastrous NAFTA trade deal” (the 1994 North American Free Trade Agreement, or NAFTA) with the United States-Mexico-Canada Agreement (USMCA), which is expected to go into effect later in 2020. He also highlighted his tariff war against China, claiming that the resulting “phase one” agreement with China will protect US workers and intellectual property.
The economic impacts of both of those initiatives are debatable. In the case of both the USMCA and the China agreement, the net results will likely be less positive than the president proclaims. And the potentially positive results all lie in an uncertain future, while the economic disruptions caused by the president’s tariffs are real and ongoing.
One aspect of his trade agenda that President Trump did not mention in his State of the Union address is his promise to reduce the US trade deficit. Despite the president’s long-running criticism of the deficit and claims by his top economic advisers that reducing the deficit is key to the president's economic program, this morning’s monthly US Department of Commerce report on trade shows that the gap between what Americans export to the rest of the world and what they import remains large by historical standards.
This latest Commerce Department report covers trade through December, thus providing the first picture of US trade for the full year of 2019. In 2019, the US deficit in goods and services trade was $616.8 billion, slightly less than the 2018 deficit, but more than 20 percent greater than the 2016 deficit the Trump administration inherited from its predecessor (as the nearby chart from the Commerce Department report illustrates). The story was the same for the goods trade deficit, which declined slightly from $887.3 billion in 2018 to $866.0 billion in 2019, but which was still more than $100 billion greater than the $752.5 billion deficit in 2016.
Source: Department of Commerce
Thus, in the third full year of the Trump administration, despite the president’s aggressive tariff wars and alternative trade deals, the US trade deficit remains significantly higher than when President Trump came into office.
In reality, the trade deficit is not a problem, and nothing a US president need apologize for. As economists since Adam Smith have patiently explained, the trade balance is not a scorecard of who is winning or losing in international trade. What matters is the freedom of Americans to trade—to both import and export—and how expanding trade allows America to produce more wealth as a nation than it would with less trade.
As the record under President Trump affirms, the overall deficit is not determined by tariffs or trade agreements, but by underlying macroeconomic factors, primarily the national level of savings and investment (as I’ve explained elsewhere). The persistent trade deficit under President Trump reflects both positive factors, such as a strong economy that has stimulated investment as well as demand for imports, and negative factors, chief among them the now $1 trillion federal budget deficit that devours domestic savings while attracting foreign investment in US Treasury notes.
The president scolds foreign nations for not spending more dollars on US exports, while at the same time he presides over a federal government that competes for those same dollars to finance its insatiable appetite for borrowing.
According to today’s Commerce Department report, the bilateral goods and services deficit with China did fall sharply in 2019 compared to 2018. This was a predictable result of the tariff war the administration launched against China in July 2018. Those tariffs “succeeded” in reducing imports from China by 16 percent from the year before, while the inevitable Chinese retaliation reduced US exports to China by 11 percent, thus reducing the bilateral deficit from $419.5 billion to $345.6 billion.
Just as predictably, the overall US trade deficit hardly budged. Without a change in the macroeconomic factors that determine the overall trade balance, a drop in the bilateral deficit with China was bound to be largely offset by increases in deficits with other countries or by decreases in bilateral surpluses with other major US trading partners. And that is just what happened in 2019.
If President Trump’s picture of the US economy is broadly true, then this comeback has occurred with the old NAFTA still in full force, without any major changes in China’s trade or industrial policies, and with an annual US trade deficit even higher than the one President Trump inherited. As this morning’s trade report confirms, America’s ongoing economic success has come despite, not because of, the president’s distinctive approach to trade policy.