Matthews Asia on Trump: Focusing on the US trade deficit is not a solution

Is trade bad for American companies, workers and consumers—especially trade with China? President Donald Trump appears to think so.

During a 2010 television interview, Trump said, “I would love to have a trade war with China.” Six years later, on the campaign trail, he railed against the US trade deficit as “not some natural disaster,” but a “politician-made disaster,” and called the North American Free Trade Agreement (Nafta), “the worst trade deal in history.”

As president, Trump has declared, “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs.”

It’s not about the trade deficit

Some of Trump’s advisers have argued that the decline in US manufacturing employment has been caused by the US trade deficit (which means the US imports more than it exports). Economists usually discuss this issue in terms of the current account balance, which covers imports and exports of both goods and services (as well as net income and transfers from aboard, although these are a small fraction of the total).

The US has run a current account deficit every year since 1992, because the value of imported goods and services has been larger than the value of exports of goods and services. But this has not caused an increase in US unemployment. In fact, the unemployment rate has been relatively low during times when the US current account deficit has been relatively large.

Running a significant current account surplus did not protect manufacturing jobs in Germany and Japan.

The relationship between savings and investment also helps explain why protectionist measures, such as higher tariffs on imports, will neither reduce the US trade deficit nor boost US manufacturing employment.

High tariffs would probably result in higher consumer prices in the US, but if they did succeed in reducing imports, that would squeeze the supply of US dollar in global currency markets, leading to a stronger dollar. The stronger dollar would make American exports more expensive and U.S. imports cheaper, so the US current account balance would return to its original level, which was in line with the balance between savings and investments.

Nearly all economists agree that trade is good for the overall welfare of societies and countries. Contrary to the rhetoric, American manufacturing remains quite healthy, with industrial output at close to record levels. What has declined is manufacturing employment, leading to the popular (but incorrect) perception that American manufacturing is in trouble. In fact, the decline in such jobs is largely the result of good news: rising productivity.

Change—primarily from advances in automation, and from shifts in consumer spending preferences—has always led to labour market volatility. Some occupations expand and thrive, others fade away, and brand new occupations appear. But, technology, not trade, is the main driver of this trend.

We need to acknowledge, however, that over the last 15 years, a rapid rise in US imports from China added to that labour market volatility, especially in labour-intensive sectors such as garments and furniture.

But China’s 2001 entry into the World Trade Organization (WTO) has not “enabled the greatest jobs theft in history,” as Trump has claimed.

It is also important to recognise that trade with China (and the rest of the world) is not a zero-sum exercise. US workers and firms benefit significantly from exports to China. Since China joined the WTO, US exports to China rose by 500 per cent, while US exports to the rest of the world were up by only 90 per cent. One study found that US exports to China directly and indirectly supported 1.8m new jobs in 2015.

Focusing on the US trade deficit is not a solution. Instead, the US government needs to do a better job supporting the small minority of the workforce that has been hurt by import competition, and a better job helping Americans learn the skills required by sectors where the US retains a comparative advantage.

Some politicians are now questioning the value of trade because they believe that American manufacturing is in decline. That belief is not supported by the facts. American manufacturing remains very healthy, with output close to record levels. From 1980 until the end of 2016—a period that includes the start of Nafta and China’s entry into the WTO—US industrial output is up 99 per cent.

Manufacturing compensation has also risen at a healthy pace. Average compensation per full-time employee rose 64 per cent in manufacturing and 61% in private industry between 2000 and 2012, according to the US Government’s Bureau of Economic Analysis.

As mentioned, what has declined is manufacturing employment (a reduction of some 2.4 million jobs), leading to the popular perception that American manufacturing is in trouble. In fact, the decline in manufacturing jobs is largely the result of good news: rising productivity in U.S. industry.

Another reason for declining manufacturing employment is the rising importance of the services sector in the US economy.

This helps explain why service industries account for about four-fifths of the US economy and employ over 80 per cent of American workers, with both shares rising steadily since the middle of the last century. (Of course, this is not just an American trend. In the UK, for example, services accounted for 79 per cent of total employment in 2014.)

There is, of course, a very large impact on the individuals, families and communities affected by the 2.4m lost jobs from manufacturing, but it is also important to put that number into the context of a U.S. labour market that experiences significant turnover every month.

Those 2.4m jobs were lost over a more than 10-year period. In contrast, over the last quarter of 2016, there were an average of just over 5m new hires each month and an average of 3m “quits” or voluntary separations each month, according to Bureau of Labor Statistics.

It is likely that many jobs lost to Chinese imports came in “routine manual” occupations. The sectors most exposed to competition from Chinese imports have been computer and electronics, followed by the textiles and furniture industries, as well as metal and machinery, according to a working paper published by economists at the St Louis Federal Reserve Bank.

Andy Rothman is an investment strategist at Matthews Asia