Balancing the Broken: The U.S. Trade Deficit Examined
An issue of international importance full of charged hyperbole, economic fragility, and questions of national identity.
In 2000, a Memorandum by the Congressional Budget Office titled “Causes and Consequences of the Trade Deficit: An Overview” was published. In it, several high-level members of the Microeconomic and Financial Studies Division used data from the past three decades to raise concern for, and attempt to find causes of, the growing deficit the United States had been racking up from operating under the same free trade policy since World War II.
And yet, on page 19 it naively gave this excuse for writing so briefly on potential solutions to this issue; that “since the effects of the deficit are small and — in important ways — positive, there is no economic reason to use trade policy to attempt to reduce or eliminate it. In fact, such use would more likely hurt the economy.” Despite the best efforts of every President since Roosevelt, the privilege of ignorance was not to last.
For the year 1998, the U.S. recorded a trade imbalance of -$168.8 billion (inflation adjusted, -$269.5 billion) amidst a larger financial crisis in Asia and the Pacific; then in 2003 -$541.8 billion (-$766.3 billion), weaning down to -$419.9 billion (-$509.3 billion) in 2009, then ratcheting back up to -$536.7 billion where it stands today.
To put it another way, the United States of America, with the largest economy in the world by nominal GDP, has also consistently imported hundreds of billions more than it exports in the most dramatic deficit in history — and while President Trump’s infamous remarks on China have gotten the U.S.-China trade “war” into the national imagination for his trademark hyperbole and generous use of Twitter, the problem is rooted in more than “trivial tariffs”.
In fact, while the Peterson Institute’s own Joseph Gagnon argues “tariffs were the wrong policy choice” and Trump’s approach was “failed”, claims which are true but not to the extent implied, he and most economists seem to still agree on the devastating consequences of failing to contain such a crisis:
Trade deficits are sometimes beneficial […] They can divert excess demand during an unsustainable boom to avoid rising inflation. But they can also cause harm, by prolonging or deepening a recession or supporting unproductive “white elephant” projects that are not able to generate the revenues needed to repay foreign lenders. […]
Prolonged trade deficits and excessive international borrowing are a well-documented cause of costly financial crashes […] These crashes cause unemployment and poverty to soar and growth and stock markets to collapse. Foreign creditors also suffer massive losses on their investments.
But while the adverse ramifications for a trade deficit have already begun to show in not only the United States but other nations like Canada and the U.K., the proposed causes — let alone solutions for such a broad macroeconomic issue are much more disputed. The Peterson Institute cites fiscal and exchange rate policy, currency manipulation, and the “secular overvaluation of the dollar”, mirroring the rhetoric of President Bush. Harvard’s Martin Feldstein blames Americans’ “saving and investment decisions”, echoing FDR. Oh, and the Congressional Research Service raises a thousand concerns at once.
Despite this, we can still cobble together a generally agreed-upon narrative for why things started to go downhill.
- The United States imports more than it exports. The American economy is finding it harder and harder to compete with the rapidly-industrialising Asia-Pacific, as the nation imports more and more foreign-made capital and consumer goods that would ordinarily be manufactured domestically, and its exports (now one-third service-based) are insufficient to match it.
- Domestic saving is decreasing. Beginning in the 1950s, saving as a percentage of GDP has been steadily contracting. Despite the natural ebbs and flows as the nation enters in and out of recessions (one notes with interest those of 1980, 1982–83, and 2008–09), the decline has persisted. Upon such a shortage, interest rates rise.
- The U.S. dollar is risk-prone. The practice of weakening one’s own currency for a dubiously-acquired trade advantage has been the subject of much controversy since first tracked in 1988, but ones which nonetheless have been observed and duly acted upon. In addition, because foreign investment does have positive effects on GDP and wages, it has become politically unpopular to advocate for its restriction. A sensible dollar policy, while feasible, will undoubtedly raise accusations of hypocrisy and may further strain the national economy already fragile post-pandemic.
- The economy has been doing well. Pandemic notwithstanding, the economy may not have returned to the routine leaps of the ‘50s and ‘60s, but has seen relatively consistent growth rates of 2.3% under President Obama and 2.5% under his successor. Even if by virtue of presiding, it is true wages and the stock market have been steadily increasing under Trump, and unemployment and poverty have been going down. During such periods of consistent growth (and constant claims of good times ahead, or already here), investment is more common than savings, and so a nation’s surplus is lessened, or deficit deepened.
Given how long this problem has defined American trade policy, it’s amazing politics in the United States isn’t more defined by the trade imbalance.
Take the ever-divisive Donald Trump: a man who made taking back America from China, rebuilding the manufacturing industry, and boosting domestic production such a centrepiece of his 2016 campaign his slogan was literally Make America Great Again. Without that precise amount of economic frailty, would we have had a second President Clinton?
Sinophobia is today a subject of much malaise, replacing Japanophobia as the primary catalyst of mean-spirited remarks, endeavours, and politically-charged cults (examples used not to target conservatives in particular, but to highlight genuinely malevolent behaviour). Would anti-Chinese sentiment be so pronounced with a stronger American economy in charge of its own trade?
And even if to be entirely apathetic on matters socio-political, one should be alarmed all the same. Costly financial blunders leads to stock market woes, which leads to mass unemployment, which leads to poverty. If the United States is to crash, fuelled by a deficit out of control, imagine the fate of nations which use the U.S. dollar as their currency, or rely on the U.S. for aid, or just have enough concerned investors to cause a similar panic as well. Even ignoring the international implications of such a recession, housing prices could plunge and the banks edge closer to failure, leading to declines in household wealth and unimaginable peril to follow as the nation’s failure to correct an imbalance goes from controlled crisis to real inferno.
Such speculation, while obviously extreme, is not entirely unfounded, I dare say. If a deficit is used to spur consumption, not domestic saving, as seems to be the case, the future children of America will defy a generations-long trend and become poorer, not richer.
If nothing else is taken away from this bleak but brief synopsis, I plead it to be this: that the trade deficit has taken the American economy down a sinister path of unemployment and financial panic. While this article has stressed objectivity over editorial for such a topic so sober, the severity of this situation must be emphasised lest more damage be done — all in search of a solution to balance the broken.