Trump’s 2018 Budget Plan Sows Confusion over Impact of Trade

Budgets are supposed to be about spending and revenue levels, but the Trump administration’s Fiscal Year 2018 budget released today contains this broadside against existing U.S. trade agreements:

Trade Deals That Have Exported American Jobs.

All across America, there are cities and towns devastated by unfair trade policies. Horrible trade deals from prior administrations have stripped wealth and jobs from our Nation. Persistent trade deficits go hand in hand with a stagnant recovery and our trade deficits have increased: net exports were about -1 percent of GDP in the early 1990s; they were -3.4 percent of GDP in 2016.

There is a lot of economic misunderstanding and faulty economic history packed into that paragraph, but here are two alternative interpretations to consider.

One, while a certain minority of U.S. producers, workers, and communities have been harmed by import competition over the years, the U.S. economy as a whole and the vast majority of Americans have benefited from our openness to trade. According to a recent analysis by Gary Hufbauer and Zhiyao (Lucy) Lu at the Peterson Institute for International Economics, “the payoff to the United States from trade expansion — stemming from policy liberalization and improved transportation and communications technology — from 1950 to 2016 is roughly $2.1 trillion (measured in 2016 dollars).” That translates into a gain for Americans from a more open economy of $7,014 per capita and $18,131 per household in 2016 dollars .

A study last year by the U.S. International Trade Commission determined that those trade agreements from prior administrations have not only increased two-way trade but also boosted real U.S. GDP, total employment, and real wages. Contrary to the statement in the Trump budget, expanded trade has increased our wealth, created better paying jobs, and delivered more affordable prices for tens of millions of consumers, especially low-income households.

Two, on trade deficits and growth, the budget statement has reality backwards. By accommodating a larger inflow of foreign investment, a trade deficit can actually enhance the growth potential of the U.S. economy. And the cause and effect runs the other way as well, as faster U.S. GDP growth attracts more inward investment and also fuels demand by consumers and producers for increased imports, expanding the trade deficit. That is why, contrary to the budget statement, rising trade deficits are strongly and positively correlated with a faster growing U.S. economy.

In its attempt to make the opposite point, the Trump budget document picks as its base of comparison “the early 1990s.” But the early 1990s were actually a time a relatively slow GDP growth as the economy shook off the recession of 1990–91. As the 1990s expansion gained steam in 1997–2000, the trade deficit also expanded sharply. I’m not sure how the administration defines net exports in the quote above, but if we look at U.S. Commerce Department data on the goods and services trade deficit as a share of nominal GDP, it increased from -1.0 percent in 1993 to -3.6 percent in 2000 — the year when everyone seems to agree the economy was performing well. By the same measure, the goods and services deficit declined to -2.7 percent of GDP in 2016, only half the share it was in 2006, before the Great Recession hit.

If the Trump administration is basing its hope for faster GDP growth and a smaller federal budget deficit on shrinking the trade deficit, it will be fighting the hard math of national income accounting as well as the real-world experience of U.S. economic performance.