Bad News For Trump On Trade Deficit

[ Posted Wednesday, March 6th, 2019 – 17:52 UTC ]

For the past few decades in American politics, the idea that a successful businessman would make a good president has been in vogue, most notably on the right. George W. Bush was supposed to be our first "C.E.O. president," and Donald Trump ran a goodly portion of his campaign on the idea that "only he" could fix all of America's problems, because he was such a wildly successful businessman.

Neither premise turned out to be true, of course. Bush was soon tested in a way no businessman ever has been -- by a massive terrorist attack and the question of how America should respond to it. Trump was never all that successful a businessman in the first place (see: his multiple bankruptcies), and continues to show a rather profound ignorance of the way macroeconomics actually works. Nowhere is this more apparent than on the subject of international trade.

After two years of Trumponomics, his own Commerce Department just released some bad news for Trump, in the form of the largest trade deficit in American history:

The Commerce Department said Wednesday that -- despite more than two years of President Trump's "America First" policies -- the United States last year posted a $891.2 billion merchandise trade deficit, the largest in the nation's 243-year history.

The trade gap with China also hit a record $419 billion, underscoring the stakes for the president's bid to reach a deal with Chinese President Xi Jinping as soon as this month.

The department's final 2018 trade report, which was delayed by the partial government shutdown, showed that the United States bought far more in foreign goods than it sold to customers in Africa, Asia, Europe and North America. The shortfall topped the 2006 record of $838.3 billion, set as the housing bubble was peaking, and marked the third consecutive year of rising deficits.

This is very bad news for Trump, who has always shown a degree of monomania when it comes to trade deficits. Part of the problem, of course, is that he just doesn't fundamentally understand the mechanics of trade deficits, or, for that matter, the tariffs he has been using to supposedly fight them. These actions can now be definitively said to have made the situation worse, not better. In fact, Trump's other economic "achievement" has also exacerbated the problem:

The president thus begins his reelection drive with a core campaign promise unfulfilled -- and with a recent flurry of economic research showing that his embrace of tariffs is damaging the U.S. economy.

Economists say the trade deficit is swelling because of broad economic forces, including a chronic shortfall in national savings that was exacerbated by last year's $1.5 trillion corporate and personal income tax cut. As cash-flush businesses and consumers increased their spending, purchases of imported goods rose while the overvalued dollar weighed on exports.

"Macroeconomics end up ruling. You can't wish it away. You can't tariff it away," said William Reinsch, a former Commerce Department official now at the Center for Strategic and International Studies.

During his first campaign, Trump swore that he and only he understood the problem so well that he'd be able to change things all on his own:

In a 2016 campaign speech in Pennsylvania, Trump called the trade deficit a "politician-made disaster" and promised swift change. "We can turn it all around -- and we can turn it around fast," he said.

It has now been two years, and not only has the problem not turned around, it has taken a turn for the worse -- due directly to Trump's intervention. This is partly because of Trump's refusal to be educated on the basics of his tariff policies. He believes what he believes, and no pointy-headed economist is going to convince him otherwise. Case in point: the fact that importers of foreign products actually pay the tariffs (not the exporters in the foreign country itself, or the foreign country's government). When importers' costs rise here in America, they recoup the money by charging American consumers more for the imports. Meaning American consumers wind up paying the tariffs, not the Chinese companies.

This is basic stuff, and does not require an economics degree to understand. But Trump still refuses to learn:

Still, tariffs have proved to be a blunt weapon. The president often boasts about how much money the U.S. government is reaping from tariffs.

"Billions of dollars, right now, are pouring into our Treasury," he told the Conservative Political Action Conference on March 2, adding that Chinese exporters are absorbing almost the entire burden of the tariffs.

But a pair of new studies concludes that he is wrong. "When we impose a tariff, it is the domestic consumers and purchasers of imports that bear the full cost of the tariffs," said David Weinstein, an economics professor at Columbia University, who co-wrote one of the papers.

Weinstein said the president appears to be relying on a 2018 analysis of data from the 1990s, when the United States represented a larger share of the global economy and had more leverage over exporters in other countries.

Weinstein's study, co-written with Mary Amiti of the Federal Reserve Bank of New York and Princeton University's Stephen J. Redding, reviewed what actually occurred last year after U.S. tariffs took effect. It concluded that Americans paid the entire tariff bill.

A second study -- by four economists from the University of California at Los Angeles, Yale University, the University of California at Berkeley and Columbia University -- reached the same conclusion.

That study also found that workers in Republican-leaning counties, especially in farm states, suffered the greatest losses from tariffs that U.S. trading partners imposed in retaliation for the president's actions.

That last paragraph is telling. The ones hurt most by Trump's tariffs are the ones who support him the most -- rural counties and farmers. Farmers are being crushed by Trump's China tariffs, and if he doesn't reach some sort of deal with the Chinese soon, this could mean a second year in a row of farm products taking the brunt of Trump's international brinksmanship. Trump has even had to bail out farmers using American taxpayer money, although this fact is rarely mentioned by Trump or even by his political opponents. We are all paying for Trump's misguided trade war, in other words, by propping up farmers who would be doing fine if Trump hadn't intervened in such a ham-handed fashion.

Trump sees trade deficits as other countries "ripping us off," because in his mind the trade deficit represents some sort of ransom money Americans are paying to foreigners -- and we all know what Trump thinks of foreigners. This is another fundamental misunderstanding by Trump that nobody has been able to correct. A trade deficit merely means that Americans are buying more foreign products than foreigners are buying American products. That's it. There is no "ripping off" or ransom involved. Americans pay for products -- value given, value received. When a consumer goes to the grocery store and buys a bunch of food, he is not paying ransom, his car is filled with food afterwards. But Trump doesn't seem to understand this.

Trump fixates on the numbers themselves. High trade deficits are bad, as far as Trump is concerned, and so he's tried to reverse the trend. But everything he's tried so far has actually moved the numbers in the opposite direction. And the ones bearing the brunt of this misguided policy are the farmers and rural Americans who voted for Trump overwhelmingly.

As farm bankruptcies rise in Midwestern states and as farmers producing things like soybeans and pork continue to pay the ultimate price for Trump's flailing on trade, it's hard to feel all that sorry for them. They trusted one man to fix international trade, and instead he's been more of a wrecking ball than a fixer. Sooner or later they're going to have to admit that their political trust was misplaced, if the trends continue.

Of course, if Trump does manage to reach some sort of trade deal with China, he'll doubtlessly announce that the problem has been solved and we should all move on. But it's doubtful that any trade agreement is going to change things all that much in the short term, and Trump has less than two years before he faces the voters again. He's already running on the slogan: "Promises made, promises kept," but his promises to "fix" the trade deficit are likely to remain unkept by the time the election rolls around. Trump promised that he would "turn around" the trade deficit "fast," and yet after two years all he's done is balloon the trade deficit he used to rail against with such fervor. The question is whether his base will notice or not, though.

Whatever happens in the next two years, perhaps American voters might change their minds on the whole "let's elect a businessman with no governmental experience to run the country" idea. It was never all that great an idea to begin with, since corporate executives' experience is wildly different than shepherding bills through Congress. Electing a businessman whose most pronounced experience is with bankruptcy was an even worse idea, when you get right down to it. Trump has proven that doing so is really nothing more than an exercise in futility. His grandiose promises about fixing the trade deficit were never going to be fulfilled, because he just doesn't understand the fundamentals of international trade at all. As his own administration just painfully pointed out, for the second year in a row.

-- Chris Weigant


Follow Chris on Twitter: @ChrisWeigant


11 Comments on “Bad News For Trump On Trade Deficit”

  1. [1] 
    John M from Ct. wrote:

    You concluded: "It was never all that great an idea to begin with, since corporate executives' experience is wildly different than shepherding bills through Congress."

    I would say the problem is a lot more fundamental than that. Corporate executives' experience is to run a for-profit private enterprise. A president's job is to run a not-for-profit public service.

    Everything this president has done since taking office shows that "running a not-for-profit public service" is a string of words he can't make head or tail of, being completely outside his worldview.

    More than a few observers have noted that he sees every decision he makes as an entirely transactional one: if I do this, does the U.S. (or, it seems sometimes, the Trump operation) do better *financially* than the other side in the immediate future? I can't think of another president, of either party, who has taken this approach to his job.

  2. [2] 
    Paula wrote:

    [1] John M: Yep.

  3. [3] 
    C. R. Stucki wrote:

    Trump isn't the only one too dumb to understand the economics of foreign trade. Exporting more than you import used to be called a "favorable" balance of trade beause it resulted in an increase in the national gold horde in Ft. Knox. Of course, it also meant that you had less goods to consume than you would have otherwise had, which lowers your standard of living.

    Conversely, when you imported more than you exported, your national gold horde decreased, but you had more goods to consume than you would otherwise have had, which raises your standard of living.

    These days, the traditional terminology still exists, but no gold ever changes hands. We now pay for the excess of imports over exports with little pieces of green paper (dollars), which cost nothing to produce, meaning we have all those low-cost Chinese manufactured goods to raise our standard of living damn near free.

    It's hard to see why an import surplus is still considered "unfavorable", but the idiot-in-chief still thinks so.

  4. [4] 
    Don Harris wrote:

    As long as we are challenging tried and untrue political axioms, let's explore a candidate must take Big Money to run their campaign and the difference between small contribution campaigns and small donor campaigns.

    While this doesn't fit the mold of the Republicans are bad and the Democrats are good bullshit you normally peddle, both parties are corrupted by Big Money so it is the reality.

    To paraphrase Led Zepplin in the live version of Stairway to Heaven:

    "Does anybody remember reality?"

  5. [5] 
    Paula wrote:

    Sherrod Brown not running. Read it in my hometown paper first - now on MSNBC.

  6. [6] 
    Balthasar wrote:

    Too bad. Brown had a chance, I really think so.

    Well, there goes one.

  7. [7] 
    Paula wrote:

    [6] This morning VOX had a long interview with Sherrod Brown about his platform. A few hours later we hear he's not running. It made me wonder if something happened - no idea what. But it was such a sudden withdrawal.

  8. [8] 
    Don Harris wrote:

    A sudden withdrawal oftens happens when the condom breaks, but by then it's usually too late.

  9. [9] 
    Kick wrote:


    A sudden withdrawal oftens happens when the condom breaks, but by then it's usually too late.

    Thank you for that spellbinding recitation of the genesis of your poor pathetic existence. #TMI

  10. [10] 
    nypoet22 wrote:

    was that really necessary? i know don makes himself an easy target, but not as easy as pie.

  11. [11] 
    Kick wrote:


    was that really necessary?

    I will concede that it was as necessary as the DH joke.

    i know don makes himself an easy target, but not as easy as pie.

    You deign to denigrate pie in such a fashion? Pfffffffffftt ;)

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