The US trade deficit in goods jumped a solid $80 billion per year in 2018 to $878 billion, a net increase of 10% over 2017. This rather abstract figure is naturally spun to reflect either a rebuke of Trump and his policies or as a sign that the economy is particularly strong, depending on your perspective. From the point of view of China, it’s a sign that they might well be “winning” a trade war.
Is that what any of it means? The long answer is no, of course, but it begs the question as to what any of it actually does mean. It’s important to put the trade deficit into context and reach a deeper understanding of the flow of money around the world. The resulting analysis does show that there is a problem in the world, a fundamental imbalance, but does not tell us how much we should be worried about it.
When talking about things like this, it’s vital that we start with an understanding of what is being measured. The figure which was released by the Commerce Department is the final figure for the net difference between the value of all physical goods which left the US minus those that came in.
This does not include services, for which we don’t have a final figure. The US typical runs a surplus in banking, accounting, and other services which reduces the total net cash flow out of the nation, on an expense basis, to about 2.3 of the figure for goods along. So we can expect that the real flow of money out of the nation to be on the order of $600 billion when it’s all calculated.
This does not include capital flows into the nation, however. Deficits in trade are often matched by net investment back into the US, which almost certainly exceeds this figure. Since that is even harder to calculate, we have to leave that aside for now.
The deficit in goods is politically important for jobs in the manufacturing heartland of the US, which is frankly where the balance of power lays. It’s also emotionally important, as it is a measure of the degree to which the nation is still a manufacturing nation such as the one which won WWII and dictated terms to the rest of the world afterward. It’s considered a measure of our prestige for largely sentimental reasons.
But is this important? You could easily argue that it isn’t important, outside of nostalgia and politics, but it does tell us one important thing. High deficits in goods mean that we are moving towards a nation where there is less for lower skilled workers to do and much more for those with the skills necessary to provide services that are valuable enough to be exported. When the deficit is made up with capital controls, the effect is even more stark – the rich are indeed getting richer and the working people have fewer opportunities.
Given this, what can we do about it? There is support among many people for more tariffs to put a stop to this deficit and create jobs for American workers. It’s a noble goal, but after a year of trying this it doesn’t appear to be working. Does it simply take longer?
The short answer to this is a solid “no.” There is no reason to expect that they will work simply because all trade in goods is related more to economic policies than to pure market forces that drive the price of goods up with a new tax. Michael Pettis of the Carnegie Endowment for International Peace explains this better than anyone:
Trade deficits and surpluses typically force monetary and other economic changes in the affected countries that tend to eliminate the imbalances. The fact that many large economies have run substantial trade surpluses or deficits year after year, sometimes for decades, violates trade and economic logic; this pattern is evidence that mercantilist policy distortions, either in the surplus countries or in the deficit countries, are preventing trade from adjusting.
In other words, in the great scheme of money moving around the globe and between income and investment, excess money in a nation drives the flow far more than the cost of a plastic widget at WalMart. If we seriously want to create opportunities in the US, tariffs will not do it.
For all the sentimental and political reasons described above, this is not welcome news. In fact, it’s very likely to be ignored as it has been for decades. It’s hardly news at all.
What we can say is that there is never any substitute for putting your national finances in order and developing policies which encourage income equality one way or another. The market will sort itself out whether anyone likes it or not, barring massive intervention to increase capital controls or other measures which would completely isolate the nation from the rest of the world.
Since no one is proposing that, we can create a simple statement: tariffs don’t work to reduce trade imbalances.
So why are we pursuing this policy? Simply put, it feels good to some people. It’s a matter of taking action in what seems like a chaotic and even hostile world. In truth, however, we live in a complex world where there are many things which are known and a few things that are not as well known as we would like, given all the change in forces brought about by a higher degree of integration across the planet. The parts that we cannot reduce to good practices, subject to political choice, is emergent and in need of experiments to show us the right way forward.
One such experiment has been run with tariffs. It shows us very clearly that they do not work, at least not in the areas that we want to see improvement. They are important areas politically, but more critically in ways tat those with fewer skills can still have opportunity to survive and thrive.
Given that this experiment, unsurprisingly, has failed we need a new approach. What we see here is that we cannot be complacent about developing a high-skill workforce and reducing wealth inequality. There is no quick fix, as wonderful as the partebellum world our grandparents lived in appears. Those days are simply gone. The numbers show this, assuming we know how to read them.