U.S. President Donald Trump continues to insist that a trade deficit is a loss — and that while exports are good, imports are bad and trade deficits are bad.
Many well-informed people and the markets have blamed such an argument on Trump’s lack of understanding about economics and trade, and have doubted his administration’s policy-implementation capabilities. Thus they believed that the chances of the administration actually implementing a protectionist trade policy would be low. But now the trade friction between the United States and its trading partners such as China, the European Union, Canada and Mexico is intensifying. The Trump administration is steadily moving its protectionist agenda forward.
Trump probably regards trade deficits as losses because he views exports as sales, imports as costs and trade balances as either a loss or a profit and thinks that trade deficits derive from costs being greater than sales. This kind of misunderstanding is often seen among executives not familiar with macroeconomics and trade. But the Trump administration has no aides or Cabinet members who can correct the president’s misunderstanding. His advisers and Cabinet members in charge of trade issues, such as Peter Navarro, head of the National Trade Council, Secretary of Commerce Wilbur Ross and U.S. Trade Representative Robert Lighthizer, share the president’s views. The administration’s obsession with reducing trade deficits is not likely to change.
The belief that trade deficits are bad comes from the economic theory of mercantilism, but the president probably does not intend to emphasize mercantilism. In Europe from the 16th to 18th century, during which mercantilism was prevalent, it was thought that the amount of gold and silver holdings determined national wealth. Therefore exports and trade surpluses, which boosted the inflow of gold and silver and hence national wealth, were good and the reverse was bad. Now that gold and silver do not represent national wealth, old-fashioned mercantilism is untenable.
The Trump administration is meanwhile trying to link the idea that trade deficits are bad with China. In fact, persuasive analyses have been made public on the matter. A study titled “The China Shock,” issued in 2016, reported that the increased imports of Chinese goods from 1991 to 2011 caused the U.S. loss of 2.4 million jobs, with 990,000 jobs lost in manufacturing alone.
Another analysis said that many of the workers who lost their jobs due to the China shock could only find low-paying employment afterward. This group of people overlaps the white working class, which forms the core of Trump supporters. That is why the Trump administration’s trade policy that claims to protect U.S. jobs by restricting imports from China receives a certain degree of support.
Yet the Trump administration has no vision beyond its protectionism. Whatever extreme protectionist trade policies it may adopt, there is almost no prospect that the policies will have the desired effects — a reduction in the U.S. trade deficit, a revival of manufacturing and a restoration of lost jobs. As long as the U.S. economy continues to experience steady growth, its trade and current account deficits will increase and never decrease.
Any attempt to cut bilateral trade deficits by restricting imports from other countries or imposing high tariffs would only push up the price of imports or competing domestic products, thereby raising costs for U.S. consumers. The Trump administration itself must be fully aware that it’s impossible to bring back lost manufacturing jobs — in particular the high-paying jobs for medium-skilled workers that the administration claims it will revive.
Since there is no prospect of gaining the desired results, I’m afraid that the Trump administration will pursue protectionism not just through the midterm elections this fall but beyond.
If there is going to be a correction to its protectionist path, that will likely happen when the policy raises the ire of American consumers who are made to bear the cost of protectionism or when the administration is ditched by its supporters angry over the lack of benefits from its policy.
The timing that these developments will happen seems a long way off given the good condition of the U.S. economy and the strong support for Trump among his backers. Until then, the Trump administration’s protectionism will take on more speed — resulting in higher tariffs on imported cars, a U.S.-China trade war and protectionism even against U.S. allies such as Japan.
Trump’s arbitrary decisions and improvised actions may accelerate. Japan and its businesses will have to anticipate a fairly high risk of trade policies being taken by the Trump administration that would be inconceivable from a common sense perspective — at least for the time being. The prospect seems that severe.
Takashi Imamura is the director of Marubeni Research Institute.