Economists to Trump: It’s Not the Trade Deficit, Stupid

Economists are increasingly alarmed at signs the Trump White House is using — and abusing — the U.S. trade deficit as a political tool to rally voters to his economic agenda, with potentially big implications for U.S. trade policy.

On the campaign trail, then-candidate Donald Trump bashed trade deals as unfair to American workers, often citing the U.S. trade deficit with China or Mexico as evidence Americans are getting outplayed at trade. He has vowed to restrict some imports in order to lower those negative trade balances, flummoxing many in the field.

“When economists hear, ‘Our goal is reduce the trade deficit,’ it baffles us,” Gordon Hanson, a trade economist at the University of California, San Diego, said. “He’s either using it as a cheap political ploy or there’s a misconception — he doesn’t understand how it operates.”

Now, White House officials are mulling a change to the calculation of the trade deficit that would make it grow, at least on paper, the Wall Street Journal reported. Under the change, “re-exports” — or goods that come into the United States and are immediately shipped out again — wouldn’t be counted as exports but would still be tallied on the import side of the ledger. Taken together, the move would swell the deficit.

Economists roundly derided the method as fuzzy math. It would “grossly and, I would say, unfairly inflate the deficit,” Gene Grossman, a trade economist at Princeton University, said.

The effort to try to create a bigger-looking trade deficit highlights the Trump administration’s laser focus on that number as a bellwether of economic strength, despite the protestations of mainstream economists. (Countries can run trade deficits or surpluses in good times or bad; they are a function of savings and investment rates more than of trade policy.)

And the new metric could provide fresh ammunition as the administration seeks to renegotiate or throw out existing trade pacts, mulls the imposition of border taxes or tariffs on imports, and generally walks away from the multilateral, free trade architecture that has underpinned global economic growth for decades.

Peter Navarro, the director of the White House National Trade Council, said in an email that the goal was “to improve our understanding of our large and chronic trade deficits so that American workers, manufacturers, and taxpayers are better served in the trade negotiation process.” He said there are “significant issues with the available data and methodologies” and said the White House would “get to the bottom of this analytical swamp.”

Many economists agree the methodology for tallying trade balances could use an update — though not at all like Trump officials are envisioning.

The calculation of a real trade balance doesn’t always capture the true value of the goods flowing back and forth, especially thanks to the growing complexity of global supply chains that weave in and out many countries. Often the final exporting country has only added a fraction of a good’s value yet gets assigned the product’s full value in the trade books.

Take the iPhone. It is imported from China, but many of its parts and intellectual property come from several countries, mainly the United States. So counting each one that enters the United States as a $200 import from China is misleading, economists say. What’s really being imported is the labor that went into the assembly of the smartphone. “It would be more informative to know how much value we are importing from China,” Grossman said.

Indeed, economists at the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization have been trying to develop a so-called “value-added” methodology for tallying trade balances. It can make a big difference. In 2011, the most recent year with available value-added data, the United States ran a $275.1 billion trade deficit with China; under the value-added approach, that was cut to $178.7 billion. The contrast is starker in electronics. The 2011 U.S. trade deficit in that sector amounted to $136.3 billion; a “value-added” deficit was just $54.2 billion.

Getting a clear notion of what a trade deficit really measures — and how to best capture cross-border flows of goods and services — is crucial to avoiding poor trade policies, many economists say.

“If you want to have a better understanding of the economic impact and the economic footprint, you have to [have] a value-added perspective,” said Nadim Ahmad, who heads the trade and competitiveness division in the OECD statistics office.

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