Trump is failing on trade policy

Donald Trump’s approval rating for his handling of trade negotiations have gone from neutral to increasingly negative, down to 35 percent this week. No wonder. He promised he would narrow trade deficits by renegotiating trade agreements, using tariffs as a stick. That promise is important to his 2020 campaign, even though trade deficits are not material to the strength of the economy. Nevertheless, it’s a promise he hasn’t kept.

The U.S. trade deficit rose with 10 of the U.S.’s 15 biggest trading partners between 2016 and 2018. Worldwide, it hit a record $891.3 billion in 2018 and is expected to grow by 7-8 percent in 2019.

The deficit in goods trade with China grew from $347 billion when Trump took office to a record $419.5 billion at the end of 2018 and for 2019 it stands at $200 billion as of the end of July. U.S. exports to China dropped by more than 26 percent from China’s retaliatory tariffs.

Large soybean exports to China helped narrow our trade deficit in the past, but those exports plummeted by more than $10 billion since China halted its soybean purchases. China just announced it will exempt U.S. soybeans and some other agricultural products from its tariffs for a year, though it’s unclear what that will mean for farmers. Promised accommodations like that have not materialized in the past. Even if the tariffs are removed, the quest to recapture the lost $10 billion will be long and uncertain. China has lowered tariffs on other trading partners and found new soybean suppliers in the EU, Argentina, Brazil and Russia.

Beijing lowered tariffs on non-US products to an average of 6.7 percent, while it raised them on American products to an average of 20.7 percent.  It’s 14 percent cheaper for China to buy from Canada, Japan, Brazil and Europe than to buy from the U.S., which makes it hard for U.S. companies to compete for access to China’s 1.4 billion consumers. So we’re selling less to China and our trade gap is widening even more.

Tariffs can worsen trade deficits by reducing demand for a country’s products along with demand for its currency, which will fall against the dollar and make exports more expensive and imports cheaper. If Trump’s tariffs are weakening the Chinese economy, they are also weakening the yuan against the dollar, making it more expensive for China to buy from the U.S. and adding to the trade deficit.

That said, Trump’s obsession with trade deficits is misplaced. They’re not an indication of the strength of a country’s economy. The consensus among economists is that bilateral trade balances matter far less than other indicators such as relative growth rates of countries, the value of their currencies, and their saving and investment rates. Indeed, last year’s higher U.S. trade deficit resulted mainly from the economy’s strength and robust spending on foreign goods.

The dollar’s value also has a significant impact on the balance of trade. U.S. exports rose by 50 percent from 2001 to 2007 as the dollar declined 40 percent against the euro.

When foreign companies sell their goods to the U.S., they get paid in dollars. Those dollars return to the U.S. as investments in assets such as stocks and corporate and treasury bonds. So U.S. imports actually help find buyers for the treasury bonds and notes necessary to finance our massive budget deficit.

There are some circumstances where trade deficits could hurt us, for example if foreign buyers stop recirculating their dollars into the U.S. economy. But that’s unlikely. The U.S. is the world’s strongest economy. The dollar is the largest reserve currency and the most-used currency for commodity and other transactions.

A trade deficit can also hurt a country’s economy if it’s due to other countries not buying its goods, to the point where it damages companies and increases unemployment. Low demand for a country’s goods can devalue its currency and raise inflation and interest rates. But none of this is the case for the U.S.

Trump claims that the U.S. trade deficit caused high budget deficits and the accumulated $20 trillion national debt. That’s an example of Trump needing no basis for what he says. Trade and budget deficits aren’t connected.

If the U.S. bought nothing from other countries, it would have no trade deficit. But nearly all federal spending would continue. The government would still have to fund its agencies, the military, entitlements and all its other expenses. The U.S. ran trade deficits during years it had budget surpluses. Japan, Canada, and Australia have trade surpluses while running budget deficits. Only eight of 35 OECD countries have both types of deficits.

Even though they’re not an indicator of economic strength, Trump obsesses over delivering on his pledge to narrow trade deficits ahead of the 2020 election. But his tariffs are hurting U.S. consumers and businesses and alienating our closest allies.

Trump has justified them based on authority Congress granted to the president to set tariffs under circumstances that threaten national security. But Trump’s claim of security threats won’t stand up in court, experts say. Even Republicans have condemned Trump’s tariffs as bad for the economy. If anything, it’s the tariffs themselves that pose a threat, and it’s time for Congress to take back its full Constitutional power to set them.

Neil Baron advised the SEC and congressional staff on rating agency reform. He represented Standard & Poor’s from 1968 to 1989, was Vice Chairman and General Counsel of Fitch Ratings from 1989 to 1998. He also served on the board of Assured Guaranty for a decade.