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April 5, 2017

Are Countries with Trade Surpluses Economically Stronger?

  Investor's Business Daily

Few concepts in economics are more misunderstood than the balance of trade. People seem to assume that a trade deficit is bad and a trade surplus is good, just as budget deficits — or big ones — are bad while budget surpluses are good. No president has made more of this issue than Donald Trump, who just signed an executive order asking for an assessment of "the major causes of the trade deficit."

In his February address to a joint session of Congress, Mr. Trump reiterated, "Our trade deficit in goods with the world last year was nearly $800 billion dollars." Actually, it was about $750 billion, but that's not the whole story.

The U.S. also had a trade surplus in services of $248 billion, which the president never mentions. When combined, the 2016 trade deficit in goods and services, referred to as the "current account," was $502 billion.

The president seems to imply that countries with a trade surplus are economically stronger than countries with a trade deficit. But as the table below shows, no discernible pattern emerges.

Of the 10 largest economies with trade surpluses in 2015, only two had much stronger GDP growth than the U.S.

                           Trade Surplus         GDP Growth (%)        Unemployment (2016 %)

China                      $593.00                           6.9                               4.1

Germany                 $279.44                           1.5                               3.8

Russia                     $146.26                          -3.7                               6.0

South Korea             $90.26                            2.7                               4.9

Netherlands             $61.41                             1.8                               5.7

Singapore                $53.76                              2.2                               2.1

Italy                        $50.14                              0.8                              11.4

Ireland                    $49.10                              7.8                                6.6

Taiwan                    $47.87                              2.2                                3.7

Switzerland             $38.00                               1.0                                3.6

 

U.S.                     -$500                                    2.6                                4.8

 

Russia had the third largest trade surplus in 2015, almost entirely due to the export of fossil fuels, and its economy actually shrank significantly. Germany's economy, with the second largest trade surplus, grew at a slower pace than that of the U.S.

Mr. Trump also appears to believe that the trade deficit costs American jobs. "We've lost more than one-fourth of our manufacturing jobs since NAFTA was approved, and we've lost 60,000 factories since China joined the World Trade Organization in 2001," the president said.

However, unemployment rates don't confirm the assertion. Again, Russia typically runs a large trade surplus, but its 2016 unemployment rate was higher than that of the U.S. Italy has a small trade surplus, but its unemployment is in the double digits.

That's not to say that the U.S. hasn't lost some manufacturing jobs, but those jobs were replaced with others, keeping the U.S. unemployment rate relatively low.

The point is that several factors play a role in a country's balance of trade, including currency exchange rates, but the balance of trade plays little role in ensuring a strong economy. Indeed, trade deficits tend to rise during periods of strong economic growth.

Many economists argue that trade deficits are largely meaningless because a nation's current account is exactly offset by its capital account, which includes investment inflows.  But they aren't meaningless politically, and to no one more so than the current president.

If the president's goal is to increase U.S. manufacturing so that Americans are buying fewer foreign products and foreigners are buying more U.S.-made products, there is a right and wrong way to do it. And imposing import tariffs is the wrong way.

The good news is that Mr. Trump has proposed several changes that could achieve his goal the right way.

  • Lowering the regulatory burden and mandates — including the Affordable Care Act — on U.S. manufacturers. The U.S. has been in a decades-long regulatory explosion, making it harder to manufacture goods at competitive prices.
  • Opening more federal lands and offshore areas to U.S. drilling. Crude oil and natural gas production and refining are manufacturing industries. The U.S. imported nearly 9.5 million barrels of crude oil per day in 2015. The more we produce domestically — even exporting the surplus — the less we have to import, reducing the trade deficit.
  • Most important, lowering the U.S. corporate income tax rate so that the U.S. becomes a magnet for manufacturing.

The wrong way to do it is by limiting consumers' choices, which an import tariff would do.

Trying to revive American manufacturing is laudable — if it is done by removing barriers and creating an economic climate that allows companies and workers to be more competitive in a global economy. Mr. Trump should shelve his tariff for the time being and see if his other reforms will achieve his goal.


 

  • TaxBytes-New

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