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Why can’t Donald Trump cut the trade deficit with China?

US President Donald Trump has made reducing the US trade deficit with China a prime target of his administration, but new figures out Wednesday show that it hit a record for a second straight year under his watch.
Many factors are at work in the ballooning deficit, not all of them bad.

Strong US economic growth
The American economy expanded by an estimated 2.9 per cent in 2018. More growth means more demand for goods. Although Trump rails against imports, he and congressional Republicans helped boost the economy by passing an extensive tax cut in December 2017, which further pumped up spending. As long as the economy stays strong, it will be hard for Trump to reduce the overall trade deficit, even if he has some success in reducing the bilateral trade gap with China, said Christine McDaniel, a senior research fellow at the Mercatus Centre, a free-market think tank.

Low savings rate
American consumers sock away far less than their counterparts in many other countries, including China. If American consumers saved more and spent less, the trade deficit would likely fall, McDaniel said. One manifestation of the low US savings rate is the huge US budget deficit, which the Congressional Budget Office forecasts will grow to US$900 billion in 2019, compared with US$620 billion in the last year of the Obama administration.

Strong dollar
The US dollar is the world’s reserve currency, which means most international transactions are settled in dollars. That increases demand, pushing up the dollar‘s value compared to other currencies. A strong dollar makes US goods relatively more expensive to buyers in other countries, while making imports into the United States relatively cheaper, McDaniel said.

Supporters of Trump’s trade policies argue that the dollar is overvalued and is a leading cause for America’s persistent trade deficits with China and other countries. The Coalition for a Prosperous America, a group that vocally backs Trump‘s tariff strategy, argued in a recent paper that a devaluation of the dollar could narrow the trade deficit by increasing exports faster than imports.

Investors flock to the US
When US imports more than it exports, the trade balance shows up as a negative number in the formula to calculate gross domestic product, creating the impression it subtracts from economic growth. But McDaniel said that’s not really an accurate way to think about the figure, because imports are only subtracted from exports to avoid counting domestic consumption twice.

The trade deficit is part of a larger set of economic data known as the “current account”.

This measures balance of trade and investment incomes. The flip side of the current account is another set of data known as the capital account, which measures changes in longer-term investment positions. The capital account and the current account always zero each other out.

Trump could reduce the capital account surplus, and indirectly reduce the trade deficit, by taxing new inflows of foreign investment, McDaniel said. But that would be contrary to his goal of encouraging foreign companies to build more facilities in the United States.

Wrong tool for job

Trump is trying to use US tools to attack a problem created by global factors, a point that economists have repeatedly made over the past two years to little avail.

“I don’t know whether to laugh or cry at this point,” McDaniel said.

The agreement Trump is trying to reach with China right now is expected to include major new purchases of US agricultural commodities, energy products and manufactured goods. That could make a short-term “dent” in the two-way trade deficit, but over the long term the deficit will continue to increase as long as United States continues its low savings rate, McDaniel said.

Effects of a trade war

Some critics of Trump’s trade policies argue that using tariff threats to force negotiations, as the president has done is also further inflating the trade deficit. Ed Gerwin, a senior fellow at the Progressive Policy Institute, said imports are surging as US companies try to get ahead of any possible tariff increases.

“The deficit has grown not only because the economy is booming, but because the president’s tariffs have caused all kinds of wacky changes in trade patterns,” he said.
Source: South China Morning Post

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