U.S. President Donald Trump, speaks during a meeting with Leo Varadkar, Ireland’s prime minister, not pictured, in the Oval Office of the White House in Washington, D.C., U.S. (Photographer: Olivier Douliery/Pool via Bloomberg)

Trump Is Actually Making the Trade Deficit Bigger

(Bloomberg Opinion) -- There were a few headlines last week to the effect that the 2018 U.S. trade deficit was an all-time record. That’s a dubious assertion. Yes, the reported $891 billion trade deficit in goods did top 2006’s $837 billion, but when making historical comparisons, it’s more informative to express these things as a percentage of gross domestic product, and 2018’s deficit of 4.3 percent of GDP was well short of 2006’s 6.1 percent:

Trump Is Actually Making the Trade Deficit Bigger

What’s more, the overall 2018 trade deficit (that is, including services as well as goods) was, at $621 billion, smaller even in unadjusted dollar terms than the deficits of 2005 to 2008. As a percentage of GDP, it’s not much more than half the size of the 2005 and 2006 deficits: 

Trump Is Actually Making the Trade Deficit Bigger

One reason to play up the goods trade deficit dollar figure is of course that President Donald Trump played it up constantly on the campaign trail in 2016, and he intimated that he would reduce it quickly. Instead, it has risen, not just in dollars but also as a share of GDP. Pretty much anyone with a passing knowledge of macroeconomics could have predicted that this would be the likely result of moves by Trump and Congress to stimulate the U.S. economy with bigger federal deficits. This stimulus seems to have worked, at least temporarily, and now — as the top White House economic adviser, Larry Kudlow, put it over the weekend — “the U.S. is bound to have a trade deficit in goods with the rest of the world because we are growing much faster than they are growing and so we are buying more of their goods.” That Trump himself did not see this coming is another indication that, as someone recently said, the man doesn’t understand much about macroeconomics.

Then again, while the short-term macroeconomics at work here are pretty simple, the longer-term causes and effects of trade imbalances really aren’t. I say this from sad experience, having started writing this column on the day the trade numbers came out and gotten more and more befuddled as I brushed up on the topic. But let us plow through regardless!

There is at least one common thread in most reasoned discussions of U.S. trade deficits: the notion that they have something to do with the indispensable role that the U.S. dollar plays in the world economy. This “Triffin dilemma,” as it is frequently called, comes about because:

  1. People, businesses, governments and central banks around the world need dollars.
  2. “This accumulation of a key currency as international reserves by the rest of the world necessarily entails a large amount of ‘unrequited’ capital imports by the key currency country,” as economist Robert Triffin told Congress’s Joint Economic Committee in 1959.
  3. Such a capital-account surplus implies an equivalent deficit on the current account, which is the trade balance plus income flows.

Another, simpler way to put it is that global demand for the dollar drives up the value of the dollar, which prices U.S. products out of world markets. Triffin had warned that the resulting current-account deficits could lead to a monetary crisis followed by deflation and depression. There was in fact a crisis in 1971, and President Richard Nixon responded by ending the convertibility of dollars into gold, but what followed was inflation, an altered but still dollar-based monetary system, and far bigger and more stubborn current-account deficits than the ones Triffin fretted about in 1959.

Trump Is Actually Making the Trade Deficit Bigger

Given that even Triffin couldn’t sort out the workings of the Triffin dilemma, it is perhaps a little much to expect consensus on it among other observers. One school of thought that is worth mentioning because it seems so obviously misguided holds that bigger current-account deficits are always better because the capital inflows that are their flip side represent a global vote of confidence in the glorious future of the U.S. economy. Given that the biggest U.S. current-account deficits on record came in the lead-up to the worst financial crisis and recession in three-quarters of a century, I think it’s fair to extrapolate that capital-account surpluses (and current-account deficits) can be too big.

In this light, it seems reassuring that the current-account deficits of recent years (the full-year 2018 current-account number hasn’t been released yet) have been less than half the size, as a share of GDP, of the peak deficits of the 2000s. The deficit has been rising since 2014, but it hasn’t been exploding as it did in the late 1990s and 2000s.

One of the main things keeping it down has been a boom in U.S. oil production that has shifted the U.S. from world’s biggest net oil importer to an occasional (so far for just one week in November and another in February) net exporter. Pump the oil out of the goods trade deficit numbers, and suddenly we are a lot closer to the mid-2000s peaks (or nadirs).

Trump Is Actually Making the Trade Deficit Bigger

By reducing the current-account deficit, the domestic oil boom has reduced the U.S. need for capital from overseas  and reduced the probability of another balance-of-payments-linked financial crisis anytime soon. But along the way, it may be reducing the international competitiveness of other U.S. industries. In the 1970s, the Economist coined the term “Dutch disease” to describe this state of affairs, inspired by the less-than-great economic performance of the Netherlands in the years after a big 1959 natural gas discovery. This observation inspired tons of empirical work that hasn’t been entirely conclusive, but there is logic to the argument that a sudden big increase in natural-resource revenue can, by putting upward pressure on the value of the currency and siphoning workers and investment away from other industries, be a mixed blessing.

Trump Is Actually Making the Trade Deficit Bigger

Whether the Dutch disease is in fact to blame, U.S. manufactured-goods trade balances are now even more negative than those of the 2000s. The deficit in durable goods is at what appears to be a post-19th-century record as a share of GDP. That also seems to be true of non-automotive capital goods (machinery, aircraft, ships and such), which had stayed in surplus until the early 2000s.

As with just about anything trade-related, it is possible to put an optimistic spin on this. The big capital-goods deficit could reflect U.S. industry gearing up for future growth, and both durable-goods and capital-goods exports did rise briskly in 2018 (after sputtering for a few years before that), just not by as much as imports. Still, as key capital-goods exporter Boeing Co. faces major problems overseas because of safety concerns about its 737 Max jet, and U.S. authorities struggle to keep China’s Huawei Technologies Co. Ltd. from dominating the global rollout of 5G mobile networks, it is also possible to come up with a negative spin in which the Triffin dilemma, Dutch disease and other factors erode the competitiveness of the U.S. economy, leave Americans relatively poorer, and eventually make it harder and harder for the country to meet its obligations to foreign investors.

It is a version of this negative spin that has animated Trump’s trade policy. But because his White House has focused almost exclusively on tariffs and bilateral trade negotiations and ignored the macroeconomic and financial forces at play, its efforts to bring down the trade deficit seem doomed to keep failing — unless they end up causing a recession, which is a reliable way to shrink the deficit temporarily, although not exactly a winning economic approach overall.

What might succeed? Triffin suggested in 1959 that the U.S. push countries around the world to replace their dollar holdings with a sort of supranational currency managed by the International Monetary Fund (John Maynard Keynes had proposed something similar during World War II), and in the 1960s the IMF followed up by creating “special drawing rights” with a value determined by a basket of major currencies. These SDRs didn’t exactly catch on at first, or at second or third, but in the wake of the 2008 financial crisis, they had a brief moment. The IMF issued a big new batch of SDRs, the governor of China’s central bank endorsed them as a “light in the tunnel for the reform of the international monetary system,” and U.S. Treasury Secretary Tim Geithner said he was “quite open” to giving SDRs a bigger role. The dollar immediately fell in currency markets in reaction, a political stormlet ensued, and within a few weeks Geithner was assuring Republican U.S. Representative Michele Bachmann at a congressional hearing that he was categorically opposed to allowing the dollar to be supplanted as the world’s reserve currency.

Bachmann’s assertions at the time that increased use of SDRs would entail giving up the dollar entirely and moving to “a One World currency” were more than a little misleading. But allowing the dollar to be displaced as a reserve currency would entail trading away some of the U.S.’s global power and, temporarily at least, some of its wealth — the “exorbitant privilege,” as French politician Valerie Giscard d’Estaing famously put it — in exchange for shedding a burden (an “exorbitant burden,” as economist Michael Pettis calls it) that seems like it might eventually become unbearable. This would actually be entirely in keeping with other efforts by Trump to get the U.S. to retreat from its global role. It would also, however, involve (1) empowering a multilateral organization (the IMF) and (2) making some effort to understand the (admittedly less-than-clear) economics of trade deficits. I don’t often make predictions, but here’s one for you: This not going to happen while Donald Trump is president.

The 2018 GDP number I used as the denominator here predates last week’s trade data, and as it is revised the ratio may not stay right at 4.3 percent. But it’s not going to change by much.

Another 1959 Triffin quote: "Does the evolution of our balance of payments on current account suggest that we may be in danger of pricing ourselves out of the world markets?"

I realize that there are those who argue that this wording puts things backward: that it's really foreign governments running too-conservative fiscal policies that are forcing the U.S. to borrow. Which may be true! But I don't think it changes the overall argument here.

The durable-goods trade numbers are available from the Bureau of Economic Analysis going back to 1929, the capital goods numbers to 1967. A 1994 paper by economist Robert R. Lipsey contains estimates of 18th- and 19th-century U.S. trade statistics that don't exactly match those categories, but do show big trade deficits in manufactured goods that finally turn to surpluses in the early 20th century.

Let's skip the debate about Modern Monetary Theory for today.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

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