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Trump Is Losing the Trade War by One of His Own Metrics

President Donald Trump is losing his war on the U.S. trade deficit and the evidence is growing that his own tariffs are at least part of the reason why.

The U.S.’s monthly deficit in goods and services with the world reached its highest level in a decade in October while the deficit with China hit a record, according to data on Thursday.

The new report showed the deficit grew more than 11 percent through October from the year before and thus pointed to an awkward emerging reality for Trump: If the pattern holds, by the end of this year the U.S. trade deficit will have reached $600 billion for the first time. It also will have grown by more than $100 billion, or a fifth, from when Trump took office in January 2017.

Economists tend to express bemusement at Trump’s obsession with trade deficits and particularly bilateral ones. In simple terms, buying more stuff from a neighbor than they buy from you can just mean you end up with more stuff, and have more cash to buy it with. It doesn’t always mean you are worse off economically.

Economists also point out that the growing trade deficit has as much, or even more, to do with U.S. fiscal policy and currency swings than it does with trade policy.

But the president appears to treat the U.S. trade balance much as a CEO would a profit-and-loss statement. He has made unwinding what he portrays as decades of “losing” to other countries the centerpiece of his trade policy and the justification for the tariffs he has rolled out.

Trump’s Challenge
The problem for Trump is that the laws of economics are not bending to his plan.

Much of the trade data remains messy. Trump’s tariffs, for example, caused a well-documented scramble earlier this year to import Chinese products ahead of the new import taxes taking effect. And vice versa with U.S. exports of soybeans and other commodities hit by Chinese retaliatory tariffs.

But the longer term data is starting to show some trends that could be interpreted as China winning by Trump’s own metrics.

Through October, U.S. exports to China were worth $102.5 billion and down almost $1 billion from the same period last year, according to U.S. Commerce Department figures. The value of imports from China, meanwhile, was up by almost $35 billion to $447 billion.

U.S. Exports
Economists at Oxford Economics said in a note Thursday that they didn’t expect the broad trend to change much, even after the weekend dinner between Trump and China’s Xi Jinping at which the Chinese side agreed to increase its purchases of American exports.

“Although China has agreed to import more farm, energy and industrial goods, and restart importing soybeans ‘immediately,’ we look for export growth momentum to continue to wane,” they wrote, pointing partly to a slowing global economy.

Analyses have also begun to surface showing that the U.S. tariffs on China may not be as effective as Beijing’s retaliation.

One, by Tariffs Hurt the Heartland, a coalition of business and agricultural groups lobbying against Trump’s new duties, found that imports targeted by U.S. tariffs had continued to grow through September. At the same time U.S. exports of products targeted for retaliation by China, the EU and other American trading partners had been hit hard, with exports declining more than 26 percent through September.

The trade trends are corroborated in other data. The ISM services index, which surveys non-manufacturing companies monthly, showed that imports rose to the highest level since March while exports decelerated by the most since May. Likewise, ISM manufacturing data in recent months has shown a decline in export orders.

Dollar Strength
Economists also like to point out that Trump’s trade policy isn’t the only factor hitting the U.S. trade data.

In trade weighted terms the dollar is up about 8 percent this year, causing imports to be that much cheaper and hurting the competitiveness of U.S. exporters.

The fiscal stimulus provided by the tax reforms that took effect earlier this year has also played a role. If you stimulate growth in the U.S. via a tax cut, American consumers will buy more imported goods.

“Given that the fiscal stimulus effects are likely to continue well into the second half of 2019, we think this trend of consumption and government spending leading growth is likely to continue,” said Barclays U.S. economist Pooja Sriram. “When this happens, imports also tend to pick up.”
Source: Bloomberg

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