Trump’s Huge Trade Deficit Means America Is Doing Great

(Bloomberg Opinion) -- President Donald Trump came into office promising to close the trade deficit and restore U.S. manufacturing. Instead, the trade deficit has grown by more than $100 billion since he took office, to $621 billion. Meanwhile, manufacturing in America is doing better than it has in a generation. This is not a coincidence.

In fact, if the president wants to make American manufacturing great again, he’ll have to reconsider his position on the trade deficit. He’ll probably never go so far as to celebrate it, but maybe he won’t hate it quite so much.

The president often talks about the trade deficit as if the U.S. were a business: If the country sells more to its customers than it pays to all its suppliers, then it has made a profit. The U.S. economy is far more complex than that, with businesses and consumers making short- and long-term investments.

When the U.S. economy is doing well, U.S. consumers tend to spend more on big-ticket items such as appliances and automobiles. At the same time, U.S. businesses will tend to increase their investment in new plants and equipment. On both those metrics, the U.S. has held up pretty well over the last year. That means more U.S. purchases overall — of both domestic and foreign products.

U.S. trading partners aren’t faring nearly as well. Italy has been in a recession since the end of last year, and most of the major economies in Europe are on the edge of recession. China has also seen a significant economic slowdown, and its prospects for long-term growth look bleaker than they have in decades. Slower growth abroad means that foreign consumers and businesses are spending less both on their own products and on U.S. imports.

This combination — steady or increasing spending by the U.S. on imports, and declining spending by U.S. trading partners on American exports — has resulted in a wider trade deficit. And that is a sign of American strength, not weakness.

Relatively weak growth around the world has also raised the value of the dollar. Investors abroad see the U.S. economy, with the deepest financial markets and the most profitable corporations, as a safe haven. To make these investments they have to buy dollars, raising its value.

So a stronger dollar also adds to the trade deficit — and while it also tends to produce a slight drag on U.S. manufacturing, it’s not enough to dent the overall strength of the economy. That’s why manufacturing employment has continued to grow, even as the balance of trade has deteriorated.

Trump’s economic advisers have said they intend to replicate last year’s impressive growth rate of 3 percent. With the global economy continuing to slow, that will be difficult but not impossible. If they succeed, they’re also going to have to prepare the president to accept what such a strong economy will bring: an even larger trade deficit.

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

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.

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