The U.S. economy is in excellent shape, a disappointing February job growth report notwithstanding. The unemployment rate is only 3.8 percent; inflation is under control. Both real wages and productivity growth have recently improved. The number of people in the United States working in manufacturing is 12.8 million, up 1.4 million from its Great Recession low point.
Meanwhile, the United States’ merchandise trade deficit hit $891 billion in 2018. Many greeted the news by noting that it was a defeat for President Donald Trump’s policy of tariffs and threats of tariffs, and it certainly was.
However, the coexistence of a huge trade deficit with robust job creation was more than a refutation of Trump’s policy in practice - it debunked the theory behind it. There is simply no necessary connection between the size of the trade deficit and the general level of prosperity. In the context of relatively strong growth, it is no surprise that Americans would spend more disposable income on imports, thus swamping the impact of tariffs. Ironically, Trump’s massive tax cuts were part of the reason for this: A trade deficit is the necessary flip side of negative net national savings, for which today’s huge budget deficits are partly to blame.
Lesson: Large economic forces such as federal fiscal policy, currency fluctuations and the like have as much or more to do with annual trade deficits.
That puts the current trade policy debate in proper perspective. The apparently impending deal between Trump’s negotiators and China’s reportedly features Chinese promises to buy more U.S. grain and natural gas, along with pledges of greater equality for U.S. businesses operating in China. It could help reduce but cannot seriously dent what is now a $419.2 billion merchandise trade deficit with that country.
With November 2020 just around the corner, Trump’s threat to blow up NAFTA looks more and more like a threat to blow up his own re-election.