Does the trade deficit hurt or help the US economy?

A tugboat guides the Orient Overseas Container Line’s (OOCL) Malaysia container ship, into dock after arriving at the container terminal in Southampton, UK. (Bloomberg pic)

WASHINGTON: US President Donald Trump fervently denounces America’s global trade deficit and accuses China’s trade policies of killing US jobs and businesses.

He launched aggressive tariff policies and demanded renegotiation of trade deals to correct the imbalance between exports and imports.

But does a trade deficit hurt or help the world’s largest economy? Disagreement on this point extends all the way to the corridors of the White House.

What is a trade deficit?

A country that imports more foreign goods and services than it sells to other countries has a trade deficit.

The United States has run a chronic trade deficit for nearly 50 years. In 2017, the gap hit US$552.3 billion (RM2.3 trillion). The deficit with China alone was a record US$335.7 billion.

But spending more money on imports does not necessarily hurt the country doing the buying.

Companies benefit from cheaper and better inputs, while focusing on producing products and services that they are better equipped to provide.

And consumers benefit from lower prices.

A disputed premise

Most economists dispute the claim that a trade gap increases unemployment or damages the economy as simplistic if not erroneous.

This view generally focuses on manufactured goods, or the billions in annual imports of consumer items in high demand: clothing, telephones, computers and household appliances.

But the US economy increasingly is dominated by services including travel, finance and media, and in that category posted a surplus of US$255.2 billion last year.

Furthermore, statistics show the trade deficit grows when the economy is healthy, and shrinks as the economy slows, as Americans consume less, driving down imports.

In 2009, the US trade deficit plunged 45.8% as the American economy screeched to a halt in the wake of the global financial crisis.

With above-trend growth in the first 10 months of this year, the deficit rose 11.4% compared to the same period of 2017.

Services dominate

Trump’s former economic advisor Gary Cohn made repeated efforts to show the president that a trade gap is not a threat, and that America’s prosperity no longer depended so heavily on manufacturing, according to the investigative reporter Bob Woodward.

In Woodward’s recent book, Fear, Cohn said he told Trump that “trade deficits were irrelevant and could be a good thing, allowing Americans to buy cheaper goods,” while “80 plus% of our GDP is in the service sector.”

And he said people are happier working in air-conditioned offices rather than toiling at blast furnaces.

Purchasing power

Importing cheaper goods from countries like China, boosts the purchasing power of American consumers who can see their income go further, and can even use those savings to purchase locally-made products as well.

Companies also save, with lower costs for imported components, boosting their profits.

But imports can hurt sales of local products, in which case growth can slow and jobs losses can occur.

Financing the trade deficit

To balance the trade gap, the United States must either borrow or attract foreign investment.

Exporters, rather than buying an equal amount of imported goods, can invest in assets like stocks, US Treasury debt, corporate bonds or real estate, which can in some instances create jobs.

But Peter Navarro, a hardline Trump trade advisor, believes the trade deficit threatens US national security since it makes Washington dependent on foreign investment.

US dollar

Finally, the exchange rate is key factor. With a strong economy – and the US has outpaced most of its trading partners – the dollar strengthens, making foreign products cheaper and more attractive to US consumers.

But a strong dollar makes US exports more expensive to consumers in other countries, hampering American companies from selling in foreign markets.