Republican presidential nominee Donald J. Trump’s platform has consisted largely with one key factor within the U.S. economy: the trade deficit. The primary reason why this has been a focal point throughout his historical run for office is because his voter base is primarily seen throughout the rust belt and Midwest, which in most cases have seen significant economic hurdles.
However, if you ask his supporters (I’ve asked a few anecdotally) not many would be able to explain what a trade deficit is. For those that don’t know, a trade deficit is when the value of a nation’s imports exceeds exports.
Furthermore, Trump tends to blame two countries for this: China and Mexico. It’s important to note that the U.S. is not directly trading with China or Mexico as an entity, but U.S. business owners (both small and large) and consumers are exchanging goods and services across borders. This is good.
The primary reason why the U.S. has a large trade deficit is because the economy is comprised almost entirely from consumption.
Even if Trump was to tinker with the deficit, he has yet to lay out an articulate course of action, and deficits don’t just disappear.
In order for Trump to reach a trade surplus (or just diminish the deficit), the value of imports would have to decline while exports either increase or stay the same. While it is assumed that the U.S. does not export, current levels are near highs last seen just before the Great Recession.
As economists Benn Steil and Emma Smith put it, a deficit is the result of a deficit between savings relative to investment. If savings and investment do not move after the value of imports fall, which Trump’s plan doesn’t mention, than exports must fall by the equivalent.
There is also an exchange-rate mechanism built-in that acts as a headwind to surplus status. If imports fall, it leads to lower demand for non-U.S. currencies. This would push the value of the U.S. dollar higher and cause exports to foreign buyers to become more expensive. The increased purchasing power of the dollar would then make imports less expensive for U.S. businesses and consumer and would likely equate to more imports.
The U.S. trade deficit saw huge declines through 1988-92 and 2006-09 as investment declined more relatively to savings. What followed were the two worst U.S. recessions in 40 years, with the Great Recession being the worst economic period since the Great Depression.
And if turning the deficit into a surplus was the cure-all to “Making America Great Again,” then the nearly 20 percent surpluses during the 1930s would have surly pulled the U.S. out of economic despair, but it didn’t.
Protectionism does not work, and Trump trying to bend the economic reality won’t work either. He often related his popularity with the Brexit — where the U.K. voted during a historic referendum to leave the European Union.
However, a large part of leaving the EU for the U.K. was to break away from the stifling economic protectionism that has hindered European growth for decades.
The average Eurozone (19 of the 28 countries in the EU) GDP since 2010 is 0.25 percent, and the EU growth performance is not much better.
There is no question that trade pacts should be updated and beneficial to all parties, but to conflate a trade deal with the trade deficit is nonsense.
Not every country can achieve a surplus, and not every country needs one. One country’s surplus is another’s deficit. Global economic interdependence policies over the past 75 years have increased the standard of living immensely due to competition. Above all, a trade ban or limitation of Mexican or Chinese products will not reignite the U.S. manufacturing industries to its former glory as heavy investment is needed and Industry 4.0 is changing how trade deficits are defined.
With a decade in FICC, Chris Lemieux brings a unique blend of cross-market analysis, macro strategy and contrarian thought in developing forecasts. Often outside consensus, Chris has been able to deliver huge predictions in this dynamic market environment. Due to his uncanny accuracy – and a forthright approach – his analysis and forecasts see widespread distribution and commentary.
As the co-founder of MacroView Research, Chris upstands dynamic markets must be met with dynamic analysis and rigorous processing. MacroView strives to understand what’s happening in markets and how it can impact investors. You can follow him on Twitter at @.
Joseph Jones spent over 10 years in industry, where he was responsible variously for corporate strategy, econometric forecasting, financial analysis, and project management. He is experienced in risk management, macroeconomic advisory roles and business operations. In addition, Joseph is monitoring more than 20 economic bubbles that are brewing right now.
As the co-founder of MacroView Research, Joseph understands the dynamic markets must be met with dynamic analysis and rigorous processing. MacroView strives to understand what’s happening in markets and how it can impact investors. You can follow him on Twitter at @EconomicHedge and @Macro_View.
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