Latest 'Trade Deficit' Figures Show Why They're Meaningless

President Trump’s protectionist trade policies have been in place for over a year now. What’s the result? The U.S. trade deficit is bigger than ever.

The Commerce Department reported last week that the U.S trade deficit hit a new record - $881 billion. The trade deficit with China also reached a new high - $419 billion - despite the Trump Administration’s tariff measures aimed at curbing it.

Why the disconnect? For one thing, an increased trade deficit is a sign of a growing economy - something government should try to encourage, not discourage. When people have more money, they purchase more goods from outside the country. In fact, exports did go up (6.3 percent) — just not as much as imports (7.5 percent). This is the third consecutive year of increased trade deficits, topping a record set in 2006 - when the United States was in another period of economic growth. The last time the United States had a trade surplus was in 1975, when the country was in a recession, in the middle of a decade characterized by stagflation. The smallest trade deficit during that time occurred in 2009, during the Great Recession.

When you make it more costly to import, you also make it more costly to export. The inputs manufacturers, such as auto makers, need become more expensive, driving up the cost of goods. Of course, when other countries retaliate, that only reduces U.S exports.

Given these facts, it is hard to see why members of the Administration and other protectionists pursue higher tariffs. People seem to confuse trade deficits with fiscal deficits. But trade deficits are balanced out by foreign investment. And, unlike fiscal deficits, they do not accrue. When one hears fiscal deficits will add $1 trillion per year to the debt, there is reason to be concerned. But the trade deficit does not accumulate, and does not have to be paid down.

Imports actually do an economy considerable good. They force domestic producers to be more efficient than they otherwise would be. They encourage domestic industries to embrace methods and systems from other countries, such as lean production methods in the auto industry and use of used steel in the steel industry. 

And they ensure consumers have a wide choice. At one time, Henry Ford could say that people could have any color Model T they wanted, so long as it was black. If one of the Detroit Three tried that today, Asian and European car companies would flood the market with a wide range of choice.

That is why it is hard to understand why any country would pursue a protectionist trade policy. All they do is deny choice to their consumers, ease the pressures on domestic producers to become more efficient, and force domestic producers to attempt what others can do more efficiently; diminishing the their ability to do what they do best. 

The trade figures released last week slap the big lie label on the notion that trade deficits are a problem for an economy. Maybe it is time to abandon efforts to reduce them.