Shrinking U.S. trade deficit likely bad news for U.S. trading partners
Ordinarily, official announcements of the monthly U.S. trade deficit get minimal attention from the media. Not so for the recent announcement by the U.S. Commerce Department of the March 2018 U.S. trade deficit.
Numerous media reports “trumpeted” the news that the trade deficit—the difference between what the United States exports and what it imports—narrowed sharply. Specifically, it decreased by more than 15 per cent from the previous month. And more specifically, the politically-sensitive merchandise trade deficit with China decreased by almost 12 per cent.
Optimists will seize on this bit of news as a harbinger of a possible relaxation of trade tensions between the U.S. and its trading partners, including Canada. To the extent the U.S. trade deficit is heading downward, the Trump administration might see its goal of dramatically reducing the trade deficit as attainable without following through on additional tariffs on Chinese products or restoring steel and aluminum tariffs on currently exempted countries including Canada. Prospects for continued increases in U.S. exports relative to imports might even temper the hardline U.S. stance in the ongoing NAFTA negotiations.
Obviously, even optimists should be temperate in drawing hope from a single data point. Indeed, a closer look at the March trade data suggests that skepticism rather than optimism might be a more appropriate reaction to recent U.S. trade developments. Why? Because the declining trade deficit is largely due to increased exports of civilian aircraft and soybeans.
These two products are targeted for Chinese-imposed tariffs if the Trump administration follows through with additional tariffs on a wide range of Chinese goods (including, incidentally, false teeth). Astute Chinese buyers undoubtedly accelerated purchases of U.S. goods threatened by Chinese tariffs, given a growing risk of higher import prices later in the year if tit-for-tat trade penalties continue among the two countries. It’s especially likely that state-owned enterprises in China have good information about U.S. products likely to be tariffed by the Chinese government in retaliation for future U.S. tariffs on Chinese goods.
Subsequently, U.S. exports to China may have simply moved into the future, and the good news for the Trump administration in the March trade data may not be repeated in future months—particularly in light of the U.S. dollar’s recent strength against the currencies of its trading partners, as a stronger U.S. dollar will discourage U.S. exports and encourage imports, other things constant. The recent upward trajectory of the U.S. dollar is likely to persist for the near future as a declining unemployment rate and growing government deficit keeps upward pressure on U.S. interest rates.
In short, the Trump administration’s fixation on trade deficits is unlikely to diminish, and this is bad news for U.S. trade partners. The continued risk of unilateral trade actions by the U.S., along with ongoing uncertainty about the stability of trade institutions such as NAFTA and even the World Trade Organization, are causing multinational companies to postpone major capital investments.
With declining unemployment rates in North America and Europe, and aging workforces in all developed countries, economic growth must increasingly come from increases in labour productivity rather than increases in the supply of labour. Capital investment is a major source of labour productivity growth, particularly in Canada. Therefore, one of the major long-run costs of President Trump’s trade policies is likely to be slower productivity growth and higher inflation, perhaps particularly in countries with deep supply-chain linkages to U.S. producers—again, such as Canada.