Why Worry About America’s Trade Deficit?

There’s no evidence that suggests a trade deficit affects economic expansion.

Fog in the Houston Ship Channel, Texas, February 21, 2008
Fog in the Houston Ship Channel, Texas, February 21, 2008 (Louis Vest)

Republican presidential candidate Mitt Romney complained in his third and final debate with Barack Obama last week that America’s trade deficit with China was “growing larger every year.” The president countered that exports to China had increased during his years in office — not doubled as he claimed though — suggesting that he, too, would be concerned about a trade deficit. Why?

The United States exported goods worth more than $100 billion to China in 2011 when their imports from the country were worth nearly $400 billion, resulting in a $295 billion trade deficit. American exports to China grew fivefold in the preceding decade while imports grew by a factor of four. The trend, therefore, suggests a convergence in the long term.

Main American export products include aircraft, machinery, plastics, power generation equipment and vehicles while the United States import clothing, furniture, games and toys as well as iron and steel from China.

If the trade deficit with China is a problem, the United States should either buy less Chinese products — which means more Americans should be making shoes and toys for their fellow citizens — or sell more to China — which means more Americans should be making airplanes and cars. It can’t very well do both.

The two presidential candidates like to reinvigorate American manufacturing which suggests that they would rather preserve existing industries than free up the labor force necessary to build and expand new and more competitive ones. At the same time, they admit that Americans shouldn’t be producing the sort of products they buy from China anymore but invest in the skills that are necessary to work in the “industries of the future,” as President Obama puts it.

Green energy is one such industry. Yet his government has set steep import duties on Chinese solar panel imports because they are subsidized and therefore sell below “fair value” — while he is subsidizing domestic solar companies.

The reason Americans were buying Chinese solar panels or Chinese clothes and Chinese toys is simple. Chinese products cost less. If President Obama believes what he says, that consumer spending drives economic growth, he should be delighted that Americans are able to save money on their purchases and buy more of other products. But he’s slapped a tariff on Chinese tire imports to preserve “a thousand jobs” in the United States. Those jobs are saved but tens of millions of Americans are now paying more for tires than they otherwise would be which means they can buy less of everything else.

America’s trade deficit with China is governed by the simple laws of supply and demand. Americans want cheap goods; the Chinese deliver. The mistake that politicians make is to think of imports as necessarily a drain on the economy while exports are necessarily advantageous. Hence Obama’s promise to “double exports.” The reality is more complex.

55 cents of every $1 dollar that is spent on a product made in China actually goes to Americans who design the products, reported The Wall Street Journal last month. That includes people who “manufacture components that are shipped to China for final assembly, transport the goods; market and retail them; finance their production and trade.” The conservative Heritage Foundation estimated that Chinese imports in apparel and toys alone sustained up to 576,000 American jobs in 2010.

If the United States were to reduce Chinese imports, those jobs are at stake. History suggests that growth would be, too.

For most of the second half of the nineteenth century, the United States ran annual trade deficits yet the period was one of the greatest economic expansion in the country’s history. Similarly, in the 1980s and 1990s, the United Stated posted a trade deficit almost every year yet those decades saw fast growth and high economic diversification.

By contrast, America ran trade surpluses almost throughout the 1930s, a time of record unemployment and economic stagnation.

That is not to say that the trade balance affects growth, rather vice versa. If the economy expands and incomes increase, the demand for imports is likely to rise with it. If the economy contracts and real incomes decline, demand for foreign goods plummets. Growth is what politicians should be focusing on then, not China’s which isn’t coming at Americans’ expense.