Latest trade report signals that, by the president’s own logic, U.S. is losing the trade war
President Trump’s trade team will find little encouragement in this morning’s U.S. Commerce Department report on trade through July. On the president’s own mercantilist terms, in which imports are a “loss” and the trade balance the key measure of success, the report signals that his tariff war so far has been a failure.
In the first seven months of 2019, with his tariff policy in full swing, total imports of goods and services to the United States have grown by 1.4 percent compared to the same period in 2018, while exports have declined slightly by 0.2 percent. The overall trade deficit, year to date, has expanded by 8.2 percent, from $345.6 billion to $373.8 billion. The deficit in goods trade has grown by $12.5 billion while the surplus in services trade has shrunk by $15.8 billion [see Exhibit 1].
President Trump and his advisors made shrinking the trade deficit a major plank of his economic program, but since he assumed office the trade deficit has actually grown larger compared to what he inherited from his predecessor. During President Obama’s second term in office, from 2013 through 2016, the monthly trade deficit in goods and services averaged $40.7 billion; under President Trump the monthly deficit has averaged $50.1 billion.
The Trump administration could claim some success in shrinking the bilateral trade deficit with China. Combining bilateral goods and services trade, which the Commerce Department reported through the second quarter of 2019 [Exhibit 20], the bilateral deficit with China shrunk by a substantial 10 percent compared to the first half of 2018. But, as noted above, the overall U.S. trade deficit continued to rise. The shrinking bilateral deficit with China has been more than offset by rising bilateral deficits elsewhere, primarily with Mexico and the European Union, but also with most other major U.S. trading partners.
As just about all economists not named Peter Navarro would advise President Trump if asked, a nation’s trade balance is not determined fundamentally by differing tariff rates applied by its trading partners, but by a nation’s level of domestic savings and investment. The United States runs a persistent annual deficit in its current account (the broadest measure of trade) because total spending on domestic investment exceeds the pool of national savings. The surplus inflow of foreign capital makes up the difference, exactly offsetting the current account deficit. Because the president’s tariffs do not directly alter the savings and investment balance, they only realign the nation’s bilateral deficits without affecting the overall deficit.
A supposed upside to the trade wars has been increased duty collections for the federal government. In July tariffs generated $6.76 billion in duty revenue [Supplemental Exhibit 1]. In the past 12 months, U.S. Customs has collected $64.3 billion in duties, almost double the $33.1 billion that was collected in 2017, before the Trump administration began escalating tariffs on a range of imports. The extra duties collected are just a drop in the federal government’s revenue bucket, but they are having a real impact on the American importers and consumers who are paying them.
One final observation from today’s report is that farm exports have been disrupted by foreign retaliation, but overall exports have suffered only a small dent. Year to date through July, exports of “Foods, feeds, and beverages” totaled $79.7 billion, down 2 percent from the same period in 2018 [Exhibit 7]. While U.S. soybean farmers have seen their exports to China plunge since the tariff war with China began more than a year ago, total soybean exports are up almost 6 percent YTD. The trade war has disrupted supply lines and has negatively impacted soybean prices, but it seems U.S. soybean growers have so far been finding alternative markets to China. Among the farm sectors suffering the biggest drop in exports YTD have been corn, down 29 percent, and alcoholic beverages (excluding wine), down 15 percent. The uncertainty and disruption caused by the trade war has been a negative for the U.S. farm sector, if not yet a disaster.