Is a trade deficit actually harmful for an economy?
Trump obsessed but it might not really matter
If you’ve ever wondered what world leaders talk about in their high level meetings, prepare to be massively disappointed.
In an interview with the New York Times, President Donald Trump pulled back the curtain on his meeting with Prime Minister Justin Trudeau and — spoiler alert — they pretty much just bickered about economics.
In the freewheeling interview on Dec. 28, Trump revealed that he groused to Trudeau last year that the United States “lost $17 billion” in trade with Canada.
“My friend Justin he says, ‘No, no, we break even.’ I said, ‘Yeah, but you’re not including oil, and you’re not including lumber,’ ” said Trump. The Times accompanied the interview with a fact-check story that backed up Trudeau’s numbers.
Trump, though, is essentially correct in his claims that the United States runs a big trade deficit overall and, with certain countries like China and Mexico, it is enormous. In 2016, the U.S. ran a $309-billion trade deficit with China and a $63-billion deficit with Mexico.
But does it matter? Is a trade deficit bad for the economy?
University of Calgary economist Trevor Tombe said that in analyzing the health of an economy he would put “zero” attention on the balance of trade. And as far as bilateral trade deficits, like the one Trump thinks the U.S. has with Canada?
“Less than zero,” said
Tombe.
In the simplest possible terms, the balance of trade is the difference between a country’s exports and imports. Tombe says the best way to understand the balance of bilateral trade is to think about your daily life. Pretty much everyone has a massive trade deficit with the grocery store, as we load goods into our carts, pay for them at the cash and then take them home. We don’t send any “exports” back to the store.
Similarly, most of us have a massive trade surplus with our employers, as we provide labour to them and accept payment for it.
Trade between countries works similarly. We import goods from countries when it makes more sense than manufacturing it ourselves, the same way we’d rather spend an hour in the grocery store each week than tending to our own livestock.
While an exported good may seem more tangible to people and politicians — you make something, you sell it and jobs are created — imports can also benefit the economy. For one, imports can be brought in to help manufacture other goods. Foreign investment in some new innovation in Canada could also spur job creation.
While the trade deficit may not matter much to economists, it certainly matters to politicians and voters. Partly, it may be our sense that a positive trade balance always juices the economy. But there’s no direct correlation there.
One of Trump’s economic advisers was ridiculed during the campaign for claiming that a trade deficit shrinks a country’s GDP. Economists, writing far and wide in the American press, called the policy paper “a mess,” based on a “rookie mistake,” or a “remarkably silly mistake,” based on who you were reading.
And there’s a natural counterpoint to that. The U.S. trade deficit has been ballooning steadily since 1980 and, in that time, the country’s GDP has more than doubled.
There’s no doubt it’s a political problem, though. A shifting trade balance affects certain pockets of the economy more than others. “As (the trade deficit) soared over the last half century, it was workers in industries that compete with imports — like manufacturing — who lost out,” wrote Eduardo Porter, a New York Times economics columnist.
Those workers were courted heavily by Trump during his campaign for the Republican nomination and in the presidential race. But aside from bellicose statements about trade deals, it doesn’t seem like Trump is doing much to fix the trade deficit.
Three major factors identified by economists in the persistent U.S. trade deficit are the U.S. dollar’s status as world reserve currency, the low savings rate in the country and near-constant deficits run by the government.
The recent tax reform bill, which will add about $1 trillion to U.S. debt, surely won’t help matters.
And even worse for Trump, the chasm has widened since he took office, partly thanks to the big talk and lack of action from the president.