President Trump’s most consistent case for his own reelection is simple — it’s the economy, stupid. He points to a U.S. economy that is in reasonably good shape, though, of course, nowhere near the “best ever” he claims. Growth has averaged 2.5 percent, a bit higher than under presidents Barack Obama and George W. Bush and a good bit lower than under Presidents Bill Clinton and Ronald Reagan. Trump promised 4 percent growth, which never materialized. But that hasn’t stopped the great salesman from repeating the refrain “promises made, promises kept.”
In fact, the one area where Trump has most clearly failed to keep his promise is central to his ideology and appeal: the trade deficit. Trump campaigned relentlessly on the notion that America’s economy was being ruined by large trade deficits. (The United States imports more goods than it exports.) He promised on the campaign trail in June 2016, “You will see a drop like you’ve never seen before.”
In reality, the trade deficit has risen substantially under Trump. It was $503 billion in 2016 and grew to $628 billion in 2018, a 25 percent spike. (It fell slightly in 2019 to $617 billion.)
When I interviewed Trump’s closest advisor (and son-in-law) Jared Kushner on CNN last month, he told me that it was obvious Trump was right about trade deficits being bad. When I then inquired why the trade deficit had gone up under Trump, his response was, “That’s because our economy’s growing. ... America has been outpacing the world.” This is correct, and you can see it in the historical data. In the past 30 years, when the United States has grown robustly, its trade deficit has tended to rise. If you want to achieve a sharp decline in the trade deficit, it’s easy — just trigger a recession. The greatest drop in the U.S. trade deficit took place in 2009, in the wake of the financial crisis.
Trade policy can get very wonky, so let me try to make this simple, building on a thought experiment by Roger L. Martin in the Harvard Business Review. Imagine a country that has less than 5 percent of the world’s population but still generates more than 20 percent of global gross domestic product. It buys far more goods than it sells, but it leads the world in the industries of the future — services and technology. It also has excellent laws protecting private investment and a strong, stable currency.
If you were living in another country, wouldn’t you want to invest your money there? This imaginary country, of course, is the United States. People might not buy as many American goods, but they buy lots of American services and invest their money in America.
In fact, while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). And remember that 80 percent of American jobs are in the service sector. (Jobs in manufacturing as a percentage of overall jobs have been declining for 70 years at about the same pace.) The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, “the trade deficit should be something to brag about rather than denounce.”
In the interview, Kushner asked, “If [trade] deficits don’t matter, then why is it that every country I deal with doesn’t want to have one?” Actually, Kushner should talk to his friend Mohammed bin Salman, the crown prince of Saudi Arabia. The Saudis run huge trade surpluses because everyone buys their oil. Yet they are desperate to attract investment and diversify their economy. A sign of massive success for Saudi Arabia’s reforms would be if it ran a trade deficit. In fact, many countries with trade surpluses — Russia, Saudi Arabia, Brazil, Iran, Venezuela — would love to be able to suck in more capital and sell more services.
In an excellent new book, Trade is Not a Four-Letter Word, Fred Hochberg, the former head of the Export-Import Bank, reminds us that the concept of a trade deficit may be outdated because goods are no longer made in just one country. He points out that the car with the greatest percentage of American “local content” actually has only 75 percent U.S. and Canadian parts. And that’s the Honda Odyssey. In fact, the top 11 local content cars in the United States are all made by Honda, and No. 12 is the Mercedes-Benz C300.
Trump’s trade policy has been an enormously costly exercise, forcing Americans to pay tens of billions in taxes on imported goods, then using tens of billions of dollars in taxpayer funds to compensate farmers for lost income (because of retaliatory tariffs) and ensuring that the global trading system will now be weakened by lots of new tariffs and barriers. All to solve a problem that isn’t really a problem.
Fareed Zakaria’s email address is fareed.zakaria.gps@turner.com.
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