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Why Trump Will Never Shrink The Trade Deficit

No, it has nothing to do with his tiny, tiny hands.

President Trump has threatened to escalate his trade war with China once again, asking the Commerce Department to consider a new 25% tariff on $200 billion in annual imports from China. Previously, the administration was considering just a 10% tariff on these goods. The decision may come as a result of reports that the trade war is hurting the Chinese economy, while so far the impact on the U.S. has been limited—a fact reflected by a buoyant stock market, low unemployment, and acceleration of wage gains.

Twinkie Trump

But the president is losing his trade war based on Trump’s own preferred statistic—U.S. the trade deficit—which has continued to grow both in overall terms and with respect to China specifically. This trend should surprise absolutely no one since slapping tariffs on individual countries will only serve to shift the source of America’s imports to countries unaffected by tariffs, while the Chinese government has more than enough tools at its disposal to counteract new tariffs with additional subsidies. Furthermore, the massive, debt-financed tax cut enacted last December will only drive domestic consumption and make U.S. assets more attractive to foreign buyers, all of which will widen the U.S. trade deficit much more than the limited tariffs imposed so far will shrink it.

Whether or not President Trump understands that the policies he has so far enacted will on balance explode the trade deficit is tough to say. He obviously has a poor grasp of macroeconomics, but it’s also possible that his invocation of trade deficits is just a cynical ploy, and that he expects to stop referring to the statistic when it is no longer useful to him. Either way, it’s in President Trump’s own personal economic interest that the trade deficit remains large and growing, and this is reason enough to bet that it will be a lot larger in 2020 that it is today.

Often misunderstood in the national discussion over trade and trade deficits is the role that international flows of capital in determining the trade deficit between two countries. When Countries like China and Germany implement policies of wage suppression, they not only make their domestic producers more competitive relative to the United States, they also create excess savings that must be invested abroad. The United States is far and away the most popular place for such investment, given the size and liquidity of markets for U.S. government debt and policies that are very friendly to foreign investors other financial assets and real estate.

Recognizing this dynamic, a policymaker who is serious about reducing the U.S. trade deficit would at least consider controlling capital inflows to the United States, either by creating regulations that make it more difficult for foreigners to invest in the U.S., or by taxing such investment. But President Trump has done just the opposite, signing a large corporate tax cut that makes foreign investment in the U.S. more attractive, while forcing Congress to scale back its plans to place more restrictions on Chinese investment in the United States.

It’s not as if the president doesn’t have advisors capable of explaining the dangers of too much foreign investment—economist and Trump Trade guru Peter Navarro wrote an op-ed in the Wall Street Journal last year warning that at our current rate “foreigners will eventually own so much of the U.S. that Americans will wind up working longer hours just to eat and to service the debt.”

But President Trump doesn’t want to consider the downside of the torrent of capital that has flowed into the United States over the past forty years, because he and the other owners of capital who hold sway over Republican Party thinking benefit from being able to sell their assets to foreigners at inflated prices. President Trump has been even more reliant on such a dynamic than the average rich dude, as the foreign share of buyers of Trump properties has steadily risen since the 1990s.

Just as President Trump can speak of foreign workers and other immigrants in the vilest of terms, and then hire them by the boatload to staff his hotels and resorts, he can lambaste the trade deficit while it lines his pockets. And while the president can be unpredictable sometimes, he has yet to institute a single policy that is counter to the interests of his company or the wealthy class to which he belongs, which is why a betting man should wager on the trade deficit continuing to rise.

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.



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