How Is Trade Working Out for You, President Trump?

In his 2016 election campaign, Donald Trump bemoaned that the U.S. trade deficit was out-of-control under President Obama.

The reasons were quite simple in his view: All trade agreements were bad. And nasty foreign countries, some of them our supposed friends, simply did not buy enough American stuff. But that would change when he would come into office to put America first!

Once in office, Trump’s populist rhetoric was quickly transformed into punitive tariffs on steel and aluminum imports and then on half of Chinese exports to the U.S.

Since that did not lead to a narrowing of the U.S. trade deficit, Trump promised more and higher tariffs. In June 2018, frustrated with his lack of success, Trump even threatened to “stop all trade.”

He believed that, being the largest importer in the world, the United States had leverage over the entire rest of the world. In the precious words of Donald Trump “Trade wars are easy to win.”

Trump’s incurable ignorance

All bluster aside, Trump’s words and actions on trade once again betray his complete and incurable ignorance on the subject.

As the graph below shows that – contrary to his campaign rhetoric – the monthly U.S. trade deficit in goods has risen ever since the President took the oath of office in January 2017.

In October 2018, the deficit stood at over $78 billion, the highest monthly amount that is on record in the economic history of the United States. The trade deficit with China is also widening and is likely to break an annual record in 2018.

Monthly U.S. Trade Deficit November 2013 – October 2018

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Why is this happening?

Why is that happening? After all, the U.S. President did, what he had promised. He hammered his trading partners with punitive tariffs.

The reason is quite simple. Only in Trump World can a U.S. President implement a gigantic tax cut largely for U.S. corporations and rich individuals, as Trump did in 2017, and – at the same time – promise to reduce the trade deficit.

His tax package will likely blow a $1 trillion fiscal deficit hole into the U.S. budget in 2018 alone. That’s HUGE.

What Donald Trump simply cannot comprehend is, precisely because he has chosen to further widen the U.S. fiscal deficits for years to come, higher trade deficits for the United States are the inevitable consequence.

You see, every country has a so-called current account balance. That balance includes balances of imports and exports of goods, services and income. In most countries, the trade balance makes by far the largest part of the current account balance.

That is true for the United States as well but, as a highly advanced economy, the United States has a large surplus on the so-called services balance. This past October, for example, that surplus amounted to some $23 billion, reducing the overall monthly deficit for goods and services to $55.5 billion.

The United States also has a significant surplus on international income because of investment returns by large U.S. corporations abroad.

The imports-exports balance

Still, even with all that in mind, at a global level, the U.S. current account deficit — which combines goods, services and incomes — is sharply negative and growing, because in totality, the United States imports vastly more goods than it exports.

But in so-called national accounting terms, which are the foundation of understanding any nation’s economy, the current account deficit is nothing else but the equivalent of the so-called savings-investment gap of that country.

In other words, the dollar amount of a country’s current account deficit is the exact same as the dollar amount of the shortfall of that country’s balance of savings versus its investments.

Savings come from three sources, public sector savings, corporate savings and private household savings.

As you can see in the graph below, the U.S. government’s net savings have sharply fallen under the Trump Administration — and especially in 2018. As mentioned above, this is almost entirely due to the pro-cyclical and fiscally irresponsible Trump tax cut that became effective at the beginning of 2018.

US Government net savings 1950-2015

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Donald Trump is not alone

Now, Donald Trump is not alone in his failure to understand these basic underpinnings of economics. Before him, Presidents Reagan and George W. Bush (Jr.) also sold the American public on the gimmick that massive tax cuts would trickle down to average Americans.

In their distorted world view — which, while pleasing Republican Party sponsors immensely, proved to be grossly off the mark — any loss of government revenues from these tax cuts would be offset by the gains in tax revenues due to accelerated economic growth.

This has proven time and again to be a Republican folly. But just because it has not worked out that way in the past evidently is no reason not to try again.

All else being equal, the country’s current account deficit – and, in case of the United States, in particular its deficit in trading goods – will rise at the same exact clip as the savings/investment gap of the economy.

The real crux of the issue is this: If Trump and his trade hardliners were serious about addressing the U.S. trade deficit, they would have to zero in on addressing the lack of domestic savings, never mind the excess of private and public sector spending. Of course, they are ready to do anything but that.

Trump’s love of debt

We know that President Trump – by temperament and by professional track record – loves nothing more than creating more debt (or, more tantalizingly, defaulting on such debt).

As Trump so proudly announced during his 2016 campaign: “I’m the king of debt.” That in combination with his plutocratic tendencies suggests that he will neither raise income taxes nor reduce the fiscal handouts to large defense contractors.

Under those conditions, the President has only one other tool at his disposal to effectively reduce the trade deficit. That is to curtail private household spending in order to bring down the nation’s growing savings/investment gap.

Another effective solution is considered a non-starter

The most effective way in doing that would be to implement a national sales tax. Heretical as that sounds to Trump’s ears, such a sales tax would cut domestic consumption.

That is something that tariffs, for all the magical powers that Trump assigns to them, cannot achieve. The reason is that a sales tax is applied to all goods and services to which it is applied regardless of their origin, thus not just to imports.

As everything, this comes at a price. A consumption tax will reduce U.S. economic growth, increase unemployment and raise expenses for unemployment benefits by the U.S. government, among other things.

And, of course, a sales tax is highly regressive as it disproportionately hurts the poor and the middle class, which is why the Democrats tend to be strongly opposed to such a move.

Notwithstanding his rhetoric, President Trump in his policy actions has shown little interest in the poor and the middle class. Why then worry so much about a sales tax? It really doesn’t matter to the rich. For them, it is not even a rounding error.

Conclusion

Mr. Trump ought to be clear about one thing. Since he has handed the keys to the U.S. Treasury to his donors via tax cuts, he is the very reason causing the U.S. trade deficit to widen.

If he were serious to fulfill his promise to reduce the trade deficit, while still handing out money to his billionaire cronies, then shifting the entire burden of economic adjustment onto the poor and middle class via a sales tax is his only option.

There is no middle ground. The laws of economics will simply not be suspended, just because a conman like Donald Trump now occupies the White House.