Why the $50 billion trade deficit should be good news for the Trump administration

This morning’s Commerce Department report of a $50.5 billion dollar U.S. trade deficit in November is consistent with a domestic economy chugging along at full employment but remains an awkward reality for President Trump and his trade team.

The good news in the monthly report is that imports and exports continue to grow, fueled by an accelerating economy at home and rising demand for U.S. exports abroad. Through the first 11 months of 2017, U.S. exports of goods and services were up 5.6 percent compared to the same period in 2016, while imports were up an even more robust 6.7 percent. The trade deficit through November was $513.6 billion, an 11.6 percent increase from 2016.

Nothing in the report should raise any alarms about the performance of the U.S. economy or the impact of U.S. trade policy. It’s certainly good, as the report details, that foreigners are buying billions of dollars more of American soybeans, aircraft engines, semiconductors, crude oil, petroleum products, and liquefied natural gas. And it’s equally good that Americans have the means and the freedom to import billions of dollars more of crude oil, iron and steel mill products, industrial machines, computers, and cell phones.

It is no anomaly that robust trade growth and an expanding trade deficit are occurring at the same time that the U.S. economy is growing more than 3 percent, unemployment is at a two-decade low, and the stock market is breaking records. Expanding trade, both exports and imports, is an essential ingredient for a healthy overall economy.

The trade numbers released today are only a problem if you view the world through a mercantilist lens that sees exports as the good side of the trade ledger and imports as the bad side. By such logic a trade deficit means that we are “losing.” That is bad economics that will lead to bad policy that will only damage the U.S. economy.

Unfortunately, that is the worldview that seems to guide the Trump administration’s trade policy.

In a document released before the 2016 election, President Trump’s current Commerce Secretary, Wilbur Ross, and trade advisor, Peter Navarro, claimed that the trade deficit is a drag on growth, in essence a $500 billion subtraction from GDP. The core fact they miss in their analysis is that any net outflow of dollars because of a trade deficit is immediately and exactly offset by an inflow of dollars to the United States in the form of net inward investment.

It is inconsistent for the administration to both complain about the trade deficit and champion the inflow of foreign investment to the United States. Two are inextricably linked.

The United States can buy $500 billion more in goods and services from abroad than we sell every year only because we attract $500 billion more in investment capital to the United States than we send abroad every year.

Every billion dollars that is invested from abroad (or reinvested in the form of “re-shoring”) is a billion dollars that could have been (but will not) be spent on U.S. exports. A foreigner who invests a billion U.S. dollars to build a factory in the United States cannot use those same dollars to buy 2 million tons of soybeans.

The Trump administration has been able to bask in much good economic news in recent months. The president and his trade team should accept today’s trade report part as one more piece of good news.