It’s been a tough week for President Trump – and it’s only Tuesday. Just when Trump nearly had the country acknowledging his omnipotence, the stock market took a record one-day plunge on Monday and then, this morning, we learned that the president’s first year in office coincided with the largest U.S. trade deficit in nine years. Lest Mr. Trump concludes that he hasn’t been protectionist enough, there is another way for him to explain (without need of contrition or humility, of course) how he presided over a bigger trade deficit in his first year than was experienced in any of President Obama’s eight.
Trade deficits are pro-cyclical and have nothing to do with trade policy. Imports rise when the economy grows. When the economy grows—and it has been growing relatively strongly this past year—households, businesses, and governments consume more. They purchase more domestic and imported goods and services. Stronger growth tends toward larger trade deficits. Maybe Trump can try that slogan on for size.
But as sure as the sun rises in the east, business writers at most of the major newspapers, magazines, and online news venues will conclude that the trade deficit is a drag on growth. Here’s Bloomberg Markets (randomly selected):
The [December deficit of $52.1 billion] add[s] to details for the fourth quarter, when trade was a substantial drag on the economy, and show[s] how a widening deficit may mitigate any gains in the pace of expansion in 2018. Net exports subtracted 1.13 percentage points from gross domestic product growth…
These writers rely on—and then misinterpret the meaning of—the so-called National Income Identify. The identity tells us how we dispose of our national income. It is not a “growth formula,” as some of the president’s advisers suggest. In an op-ed last year, Commerce Secretary Wilbur Ross and trade adviser Peter Navarro wrote:
When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth… The structural problems driving the slow growth in the US economy over the last 15 years have primarily been the investment and net exports drivers in the GDP growth equation.
The reference was to the national income identity, Y = C + I + G + X — M, which says that national output is either (C)onsumed by households; consumed by businesses as (I)nvestment; consumed by (G)overnment as public expenditures; or e(X)ported. Those are the only four channels through which national output is disposed.