Tom Saler: Trade imbalance isn't as simple as one country’s gain being another’s loss

In less than two weeks, the Trump administration is set to fire the opening salvo in a trade war with the European Union, an economic bloc whose purchases of U.S. goods and services support an estimated 2.6 million American jobs. But when a president rails against a supposed problem, you might expect him to at least be able to understand its component parts.

Regarding America’s chronic trade imbalance — a presidential obsession if ever there was one — there’s plenty of reason to question if that’s the case. Though the U.S. has endured trade deficits every year since 1975, the cause of those annual shortfalls is not necessarily a matter of one country’s gain being another’s loss.

Trade balances are the result of saving and investment decisions on multiple levels.

“If a country saves more of total output than it invests in business equipment and structures, it has extra output to sell to the rest of the world,” wrote Martin Feldstein, a professor of economics at Harvard and President Ronald Reagan’s chief economic adviser. “In other words, saving minus investment equals exports minus imports — a fundamental accounting identity that is true for every country in every year.”

China and Germany produce more than they spend; the U.S. spends more than it produces. Consequently, China and Germany now run trade surpluses of 1.3 percent and 7.8 percent of GDP, respectively, while the U.S. has a deficit of 2.7 percent, or half a percentage point more than the average since 1975.

For 30 years after the end of World War II, the U.S. trade balance rarely moved much above or below zero. Not coincidentally, American households also saved more during that time; from 1959 through 1975, the personal savings rate averaged 11.7 percent of disposable income.

Since then, personal savings have dropped to 6.8 percent of disposable income, and recently fell to a 12-year low of 2.4 percent.

Those 30 immediate post-war years also were a time of federal budget surpluses, which, for accounting purposes, can be viewed as one category of saving. Since 1976, budget deficits have averaged 3.12 percent of GDP, sending the national debt up from $620 billion to $21 trillion.

Which is why the recently enacted tax legislation could make the trade imbalance worse. Besides the $1.5 trillion tax cut that is projected to add at least $1 trillion to the national debt by 2025, Congress recently piled on another $300 billion in fiscal 2018 alone, making $1 trillion annual deficits a virtual fait accompli over the next decade.

Although budget deficits have been common over the last two-plus centuries, they tended to be small — an average of just 0.4 percent of GDP — absent a war or depression. That the U.S. is not fighting a large-scale war or climbing out of a severe economic downturn is what makes the fiscal 2018 deficit of 4.16 percent of GDP especially noteworthy, and particularly dangerous.

Foreign exchange also plays a role.

In the 1990s, a period during which America’s trade deficit expanded from 1 percent of GDP to 3.5 percent — not that anyone seemed to mind — the strong dollar policy of the Clinton administration provided U.S. consumers with additional buying power through its positive impact on import prices while making American goods more expensive overseas.

Since Trump took office, the trade-weighted value of U.S. dollar has dropped by about 10 percent, a decline that should, all other factors being equal, help to narrow the trade deficit over time.

There is no shame in someone working outside the field of economics being unable to immediately grasp a relatively arcane economic equation. That’s why presidents have advisers.

It seems, however, that Trump prefers not to listen, or at least listen to those with divergent views.

“The day I realized it can be smart to be shallow was, for me, a deep experience,” he wrote in 2004.

Smart policies generally do not flow from shallow thinking. So let’s defer to Feldstein on what’s actually behind the trade imbalance.

“Foreign import barriers and exports subsidies are not the reason for the US trade deficit,” he wrote in 2017. “The real reason is that Americans are spending more than they produce.”

Try putting that on a hat.

Tom Saler is an author and freelance journalist in Madison. He can be reached at tomsaler.com.