Donald Trump has, for thirty years, characterized the U.S. trade deficit as an economic scorecard—arguing that the American habit of annually importing more than it exports is like running a business that loses money every year.
This is, of course, utter nonsense. A national economy is nothing like a business, and the U.S. trade deficit, when compared to the nation’s trillions upon trillions in national wealth is a mere rounding error that is affected by far more than just U.S. economic policy. (It’s perhaps terrible analogies like these that led Trump economic advisor Gary Cohn to tell Michael Wolff that the president is “dumb as shit”)
This isn’t to say that the trade deficit is of no consequence—more balanced trade could mean more domestic jobs, but then again, with unemployment at historic lows, it’s more the quality than quantity of jobs that is the typical worker’s most important concern. But given that the president has placed so much significance on this statistic, it’s more than a little embarrassing that the trade deficit has only steadily risen since he took office, and that the major tax and spending policies he’s supported will only serve to make it grow.
A recent IMF analysis of large increases in U.S. government deficits says that higher deficits lead to a stronger dollar and lower net exports. Brian Stetser of the Council on Foreign Relations relies on this analysis to suggest that the latest spending hikes and tax cuts will therefore cause the U.S. trade deficit to rise by 1 percentage point as a share of GDP, or nearly $200 billion more in red ink, by Trump’s faulty logic.
Don’t be fooled last week’s fall in the dollar, which has already begun to reverse itself. Yes, investors have reasons to be more skeptical of the U.S. government’s fiscal health today than they did a month ago, motivating what MUFG's European head of markets research in London, Derek Halpenny calls “a 'triple-sell' on assets - with equities, bonds and currency sold off - where you enter this phase of a loss of confidence in dollar-related assets and policymaking.”
But global wealth has to flow somewhere, and policy making in neither Britain, Europe, nor Japan should inspire much more confidence than the fiscally irresponsible turn the GOP-controlled government has taken over the past year. Expect, therefore, for the dollar to remain relatively strong and the added tax cut stimulus to boost the American consumer’s predilection for foreign goods.
Finally, let’s not forget that global trade balances are not the consequence purely of American tax and spending laws—Chinese government policy has just as much to do with the U.S. trade deficit as anything that is coming out of the Capitol. As Michael Pettis of Peking University points out, China’s aggressive purchasing of U.S. debt is unlikely to slow in the future, even as the United States’ fiscal outlook worsens and the supply of U.S. Treasury bonds grow. That’s because, to keep Chinese unemployment low, it must maintain large trade surpluses and finance the world’s, and most significantly America’s, ability to borrow and buy Chinese products on the cheap.
In the long-term, the U.S. trade deficit and the Chinese trade surplus are unsustainable. But just as Washington has proven unwilling to to tackle the problem of budget deficits, which fuel trade deficits, China has been too slow to abandon its reliance on exports to support domestic employment, an export surplus that necessarily causes a corresponding rise in national savings that must be invested somewhere.
There’s little reason to believe that China will decide change its strategy of parking those savings largely in U.S. assets, which will buoy the U.S. dollar and make it cheaper for Americans and its government to borrow and spend. Washington policymakers may not understand this, but as a result trade deficits will continue to rise, and Donald Trump will be scrambling for some other statistic to show he’s made the economy great again.
Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.