Mar 7, 2019

Want to cure the trade deficit? Start a recession

Illustration: Sarah Grillo/Axios

The U.S. trade deficit — how much the country buys from abroad, versus how much it sells — rose to a 10-year high last year. And economists surveyed by Axios say there's only one certain way that President Trump can achieve his cherished aim of slashing it: push the economy into recession.

Driving the news: The 12.5% jump in the 2018 trade deficit, reported today by the Commerce Department, is the result of a growing economy, stimulated by Trump's tax cuts, economist agree, and not something amiss.

  • That also goes for a record jump to a $419.2 billion deficit with China, up 11.6% over 2017.
  • "People buy more, which means, in turn, that they import more. If you want to reduce the trade deficit, have a recession. Look at 2009," says William Reinsch, a senior trade adviser at the Center for Strategic and International Studies.
  • Of course no one wants a recession.

The background: Trump is conducting a multi-front trade war, the main purpose of which is to push down the country's global trade deficit, which he calls unfair and bad for Americans. Although most mainstream economists disagree — trade deficits reflect economic health, not malaise, they say — cutting the gap is a pillar of Trump's presidency.

By the numbers:

  • The annual U.S. trade deficit surged to $621 billion in 2018. For December alone, there was an 18.8% jump. In both cases, the gaps are the largest since October 2008.
  • The gap was 3% of GDP, up from 2.8% in 2017. "It’s still significantly smaller than in the decade before the Great Recession, when it approached 6%," reports Bloomberg's Katia Dmitrieva.
  • The annual gap is up by $119 billion since Trump became president. But, if you go by economic orthodoxy, that's an issue only because he has emphasized it.

"Trump is over a barrel because he has made reducing the trade deficit a measure of his success in trade policy. And by that measure he is failing," said Edward Alden, a senior fellow at the Council on Foreign Relations.

A thought bubble: Trump has voiced his view on debt for decades. His obsession doesn't mean he is taking the U.S. into recession, but that — if he wants a materially lower trade deficit — he needs to hope for one. Or to pile burdens on the economy that take the country there.

The numbers on China have especially worsened, putting Trump in a difficult political position:

  • The Chinese goods deficit is the largest ever recorded.
  • But a new trade accord with Beijing is coming: At the scale some have reported — $1.2 trillion in imports of U.S. goods over six years, or two-thirds more than 2018 spending — the agreement, if fully enacted, would reduce the deficit substantially.
  • "The real question there is whether the U.S. economy can actually produce that much more stuff," Reinsch said.

The bottom line: As of now, the relatively robust U.S. economy is staving off recession for the rest of the world. The widening trade deficit lowers 2018 GDP growth to 2.9%, 0.3% below previously reported, and that's likely to be the peak before the next economic downturn, says Joseph Brusuelas, chief economist at RSM.

  • The next step is unhappiness: "The trade balance will turn when the U.S. economy sags," said Gary Hufbauer, a respected trade expert with the Peterson Institute for International Economics. "I doubt there will be cheers when that happens."
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