Canadian Manufacturing

Claims that trade deficits signal economic weakness are ‘fundamentally flawed’

by Paul Wiseman, The Associated Press   

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President Trump has constantly blasted the U.S. trade deficit as destructive, but most economists say his ire is misplaced and that 'there is no correlation between trade deficits and weak economy'

WASHINGTON—President Donald Trump ripped into one of his favourite targets Thursday in Beijing: The United States’ “shockingly” large trade deficit with China.

“I blame past administrations,” Trump declared, “for allowing this out-of-control 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 per cent. 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.

Or look at Japan. That nation has long run trade surpluses even though its economy has lain stagnant for much of the past quarter-century.

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 per cent over the same period last year.

That said, the flow of inexpensive imports into the United States 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. It’s mainly a matter of mathematics: 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. China is notorious for subsidizing its exporters and pilfering other countries’ trade secrets. China and some other countries have also in the past manipulated down the value of their currencies—a move that gives their exporters a price edge in foreign markets. (Most observers say China hasn’t deliberately pushed down its currency for several years.)

But the main factor behind America’s vast trade gap goes well beyond any country’s bad behaviour: The United States spends more than it saves. This trend shows up as budget deficits in Washington and credit-card 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.

Trump has targeted, in particular, some of the sizable trade deficits that the United States runs with individual countries. His contentious push to renegotiate the North American Free Trade Agreement, for example, is meant to shrink America’s trade shortfall with Mexico.

But economists say a country’s trade deficit with individual countries is a pointless measure. It’s natural for the United States to run surpluses with some countries and deficits with others. At a think-tank event in Washington last month, Robert Zoellick, a former U.S. trade representative, quipped that he ran a deficit with his local supermarket.

Says Heritage’s Riley: “To expect that we should have balance trade with every country in the world—that’s never going to happen.”


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