President Trump is turning up the heat on his trade war. On Friday the president threatened to slap 20% tariffs on European cars; tariffs on $34 billion of imports from China are set to take effect next week. All this stems from Trump’s obsession with eradicating the U.S. trade deficit. By Trump’s reasoning, any country with a trade deficit is a “loser” in the global economic system and suffers from job losses, capital flight and economic weakness.
But maybe we should change our thinking about trade deficits. A deficit arises when other nations ship more goods and services to us than we ship to them. How do we wind up the “loser” in this game? We end up consuming more goods than we actually produce. The trade-surplus nations end up in a reverse situation: they end up consuming less than they produce.
It’s like your neighbor goes to the market and then leaves all her groceries on your doorstop. You have a pantry more full than your income alone would allow. Your neighbor? She may end up ahead on karma, but not in any material sense.
This is, in fact, the U.S. position in world trade. Year in and year out, other nations ship us more stuff than we provide to them. As a result, American consumers have enjoyed a higher standard of living. Persistent trade deficits imply that the rest of the world has been subsidizing American consumers for generations.
Nations are willing to accept U.S. dollars in exchange for their goods because they trust that the dollar will retain its value.
Skeptics of this perspective worry that such a good deal can’t last forever. Yet, the United States has been running trade deficits every single year since 1976 — which amounts to “forever” in practical terms. And there is no end in sight, Trump tariffs or no.
As Trump sees it, trade deficits imply America is shedding jobs. But that isn’t right either. As America’s trade deficit has increased, our unemployment rate has fallen. There are now more job openings than job seekers. All over the country, employers are decrying the difficulty of finding enough workers.
Trump often cites specific employment losses, such as an auto or steel plant closing in the United States and opening in Mexico, Canada or China. But net foreign investment into the United States keeps increasing too, which means that, overall, foreigners are creating more jobs here than Americans are in other nations.
Even in the industries that Trump likes to showcase, there is no evidence of significant decline. The U.S. auto industry produced more than 12 million vehicles in 2016, the sixth best year since 1960. The U.S. steel industry shipped 90 million tons of steel last year, close to the average of the last 40 years. These industries haven’t lost the ability to meet the demands of national security or the general economy.
Yes, employment in these industries has declined, but not because of bad trade deals. Productivity gains are the culprit here. Our technical ability to produce goods has grown so enormously that we can produce the same number of cars or tons of steel with many fewer workers. China lost over 18 million manufacturing jobs, too, between 1995 and 2000 when it consolidated basic industries and embraced advanced technology.
So long as the American economy continues to grow, Americans will have more money to spend on all goods and services, including imports. In fact, if U.S. economic growth outpaces growth elsewhere, our imports will continue to grow faster than our exports. In this case, our trade deficit will be a symptom of economic strength. It means we’re winning.
Why doesn’t every nation seek to run a trade deficit? They would if they could. Venezuela would love to run a huge trade deficit, with desperately needed consumer goods streaming in from the rest of the world and oil trickling out. But global traders don’t want to be paid in bolivars as that country disintegrates and its currency is plummeting in value.
Nations are willing to accept U.S. dollars in exchange for their goods because they trust that the dollar will retain its value. Chinese manufacturers know they can use those dollars to buy pork from Australia or wheat from Argentina. They can also use those dollars to invest in American industry or U.S. securities. The long history of U.S. dollar stability gives the U.S. this unique trade advantage — a key reason we can import more goods than we export year after year. Again, this is not a sign that we are “losing” at trade.
America reaps benefits from our ability to run persistent trade deficits — Trump just doesn’t recognize winning when it happens.
Brad Schiller is an emeritus professor of economics at American University and author of “The Economy Today.”