Why U.S. trade gap could obstruct Trump’s economic vision

The U.S. trade deficit hit a four-year peak in 2016

WASHINGTON — The U.S. trade deficit hit a four-year peak in 2016 and is posing a tough challenge to President Donald Trump’s drive to shrink the deficit, accelerate the economy and create many more jobs.

Trump’s combative stance toward America’s trading partners may not help. The president has threatened to slap punitive tariffs on imports from China, Mexico and other nations deemed to be trading unfairly. If those frictions were to fuel a trade war, it could actually worsen the U.S. trade gap.

Here’s what’s at stake.

Q: What is America’s trade deficit?

A: The deficit measures how much the value of the goods and services the nation imports exceeds the value of its exports. For 2016, the deficit totalled $502.3 billion — the gap between $2.711 trillion in imports and $2.209 trillion in exports.

Q: Was the 2016 deficit unusually large?

A: Not by the standards of recent history. But higher and higher U.S. trade gaps have become a long-running trend. (The last time the United States enjoyed a trade surplus was 1975.) The deficits shrank somewhat after the Great Recession of 2007-2009, which cut Americans’ appetite for both domestic and foreign-made products. But as the U.S. economy has regained momentum, the deficit has widened again. A key reason: More financially secure American consumers have grown confident enough to spend more on imports. Yet the same time, weak economies abroad have kept a lid on U.S. exports. So has a more highly valued dollar, which makes U.S. products more expensive overseas.

Q: Why can’t the world’s biggest economy run trade surpluses — or at least smaller deficits?

A: That’s a question Trump posed repeatedly during the campaign. He heaped blame on misconceived trade deals, which he said have exploited the United States while rewarding other nations. Private economists say the answer is hardly so simple. A nation’s trade surplus or deficit, they note, reflects diverse factors, including how strong consumer spending is at home and abroad and the value of, say, the U.S. dollar against other currencies — something the United States can’t easily control. What’s more, the United States, as a highly advanced economy, pays higher wages than many developing nations do — a potential disadvantage on trade.

Q: How does Trump plan to address the trade deficit?

A: One complaint he lodged during the campaign was that other nations, notably China, were cheating the United States by manipulating their own currency to keep it undervalued. By doing so, these nations could make their goods less expensive abroad than similar American products. Trump also attacked the North American Free Trade Agreement, which two decades ago created a free trade area covering the United States, Canada and Mexico, as a catastrophe which he would renegotiate to better protect American workers and goods.

Trump has also proposed imposing punitive tariffs — as high as 45 per cent — against such countries as China and Mexico if they don’t stop what he calls unfair trading practices that he says have cost millions of American manufacturing jobs. Doing so, however, would likely make countless goods that the United States imports from those countries — think avocados and tomatoes — far more expensive for Americans.

Q: Do economists generally think Trump’s policies would succeed in shrinking the trade deficit and restoring many American factory jobs?

A: Many economists are worried. They say they fear that Trump’s threats would not only fail to produce more favourable trade terms for U.S. companies and workers but also trigger tit-for-tat trade wars with other nations. Other nations could retaliate by raising the tariffs they impose on U.S. goods.

Q: Has this ever happened before?

A: Yes. Congress approved the Tariff Act of 1930, known as the Smoot-Hawley Act, to fight the effects of a deepening downturn. The law raised tariffs on imports in an effort to protect American jobs. Instead, it led other countries to retaliate, and global trade shrank. Eventually, a severe recession turned into a global Great Depression.

Q: Could that happen again?

A: Most economists don’t think Trump’s efforts will trigger anything like what happened in the 1930s. But there’s concern that the president could incite a trade war that would harm the U.S. economy. A more optimistic view is that Trump will use tough talk to gain trade concessions from other nations and give the United States a more advantageous playing field.

Q: Could this approach significantly shrink the chronic trade deficits?

A: Few think so. But if Trump could manage to forge better trade agreements, and if those deals helped increase U.S. exports while holding down imports, the U.S. trade gap would narrow as a result. The economy would accelerate, too. Trade is again expected to be a drag on the economy in 2017, but economists have forecast that other factors, including solid consumer spending, will lift the economy to growth of around 2.5 per cent. Even stronger expansion is expected next year if Trump succeeds in winning Congress’ approval of his stimulus program of tax cuts, deregulation and increased infrastructure spending. Most forecasters think those initiatives would deliver a bigger economic boost than Trump’s efforts to shrink the trade deficit.

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