Battle4Liberty

The US Trade Deficit rose to $621 billion from $1027 to 2018 while the merchandise trade deficit with China increased to $419 billion. It’s interesting to see how this issue is mischaracterized by those on the left. In fact, many of the same media pundits who claimed that the President’s focus on lowering the trade deficit was misguided are now celebrating the increase as a “blow to Trump” (https://www.nytimes.com/2019/03/06/us/politics/us-trade-deficit.html). They were half-right then and are completely wrong now.

The US trade deficit has many drivers, including overall economic health, strength of the dollar, and “fair” trade policies. When President Trump laments the trade deficit, he is typically focusing on the latter. Specifically, trade policies in China and other countries that unfairly hamper US competition reduce exports and contribute to the trade deficit. The President’s emphasis on equal access to foreign markets is spot on, but his shorthand assertion that fixing these issues will eliminate the trade deficit is overly simplified.

In simple terms, the US economy is growing relative to the economies of our trade partners, and the dollar has strengthened as a currency. This means that US consumers have more to spend with dollars that buy more on the global market. Even with the tariffs, this economic strength drives consumer spending for foreign goods. In other words, the increasing trade deficit is primarily driven by a strong economy, not trade policy.

If you are not convinced of my argument, just think about the opposite scenario. If the US fell into a great recession and our trading partners did not, American consumers would have little to spend on imports. The trade deficit would fall because of the poor economy. The trade deficit reflects the ability to consume more than the ability to produce.

So how does a trade deficit affect other parts of the economy? The books always have to balance, so the difference must be made up somewhere. From a national perspective, countries like China balance the trade deficit by investing in US equities, bonds, government debt, or other assets. Put another way, countries with trade surpluses are financing the growth of those with trade deficits. A high level of foreign ownership of US assets can create problems, but a moderate level does not.

A trade deal with China that makes genuine progress on issues like intellectual property, company ownership, and currency manipulation will help curb the deficit in a meaningful way. But with a strong US economy, it will be difficult to erase the trade deficit, and doing so shouldn’t be our focus.