Hefty U.S. trade gap not necessarily a sign of weakness.
WASHINGTON — President Donald Trump ripped into one of his favorite targets this week in Beijing: The United States’ “shockingly” large trade deficit with China.
“I blame past administrations,” Trump declared, “for allowing this out-ofcontrol deficit to take place and grow.”
America’s lopsided trade relationship with China and with the rest of the world is a familiar theme for Trump and his economic team. They’ve branded trade deficits a mark of economic weakness — even shame — that depress growth and kill jobs.
Yet most economists say their ire is misplaced. They reject the notion that trade is a zero-sum game in which victory goes to the countries that run a trade surplus by exporting more than they import.
“Focusing on the trade deficit as a sign of weakness is fundamentally flawed,” says Bryan Riley, a trade analyst at the conservative Heritage Foundation. “If you look over history, there is no correlation between trade deficits and weak economy.”
In fact, a swollen trade gap — which shows how much the value of imports exceeds the value of exports — can reflect economic might: When times are good, after all, consumers feel more prosperous and confident enough to spend freely — on imported goods as well as on home-grown goods.
Consider what happened in 2006, the year before the Great Recession began. The economy grew at a solid 2.7 percent. Yet that same year, the United States posted a record-high trade deficit: $762 billion.
By 2009, in the depths of the recession, the trade deficit had actually shrunk to $384 billion. The main reason: Fearful American consumers had reduced their spending on imports — and everything else.
One reason Americans spend so much on imports: A nearly limitless array of foreign products gives them a multitude of choices and lower prices. Last year, the United States ran a deficit of nearly $505 billion in goods and services with the rest of the world — including a $309 billion gap with China.
So far in 2017 through September, the U.S. trade deficit has widened by more than 9 percent over the same period last year.
That said, the flow of inexpensive imports into the U.S. can inflict pain on some areas of the country. Competition from China, for instance, has long punished the American Midwest and the textile-producing Southeast hard, wiping out hundreds of thousands of manufacturing jobs.
And trade deficits do reduce gross domestic product, the broadest measure of a nation’s economic output. GDP counts only goods and services that are produced in the United States. So imports — which are counted as consumer spending when you buy, say, Swiss chocolates — are excluded from GDP to prevent them from artificially inflating U.S. production.
Trump argues that China, Mexico and some other countries exploit unfair trade deals to boost their exports to the United States and block imports. Many Democrats agree. So do most economists.
But the main factor behind America’s vast trade gap goes well beyond any country’s bad behavior: The U.S. spends more than it saves. This trend shows up as budget deficits in Washington and creditcard balances in American households. When you spend more than you produce, imports fill the gap.
Foreigners shouldn’t be blamed, economists say, if Americans won’t live within their means.