Comment: Trump lost the trade war he said was easy to win

Not only did U.S. consumers and producers pay the tariffs, the trade deficit is at its highest since 2006.

By Jared Bernstein, Dean Baker / Special to The Washington Post

Given the precarious state of the economy, President Trump’s reckless decision to walk away from stimulus negotiations last week was a consequential act of political malpractice.

He has since flipped and flopped on this by the hour, but his actions have been particularly rash given his administration’s failure to even try to control the virus. First they ignored the health outcomes. Now they’re playing erratic politics with the resulting economic pain.

But working Americans face yet another, less widely noticed Trump-induced economic problem: the historically large and worsening U.S. trade deficit and the drag it is creating on the economy. The failure to offset this drag with fiscal stimulus is already being felt in communities across the land.

Trump clearly ran on the trade deficit as a scorecard, claiming that his trade policies would “speedily reduce the deficit,” which would drop like “you’ve never seen before.” He complained about decades of trade deals by “stupid” negotiators that allowed other countries to rip off America. Once in office, he waged a retaliatory trade war. His weapon of choice was a broad set of tariffs on many of our trading partners, from Canada to China.

Well, the data are in, and Trump’s war is lost. The trade deficit in August was $67 billion, its highest level since August 2006. For manufactured goods, the deficit was $84 billion, the biggest on record with data starting in 1992 (the deficit is also up slightly as a share of GDP).

In fact, Trump’s loss of the trade war was inevitable. Although he and his aides never seemed to understand this basic fact, the tariffs were mostly paid for not by foreign companies exporting to the United States, but by American consumers and producers.

An early hint that something was fundamentally wrong with Trump’s theory of the case was when Alcoa, America’s largest aluminum producer, asked for an exemption from Trump’s aluminum tariff, which had been intended to protect it from foreign competition. (The reason it needed the exemption is that Alcoa imports Canadian materials as inputs to its production.) Thanks in part to the trade war, American manufacturing was in a recession before the pandemic.

Instead, the determinants of our persistent trade deficits stem from at least three sources: other countries’ persistent trade surpluses (which often result from their managing foreign exchange to make their exports cheaper in dollars and our exports more expensive in their home currencies), U.S. companies taking advantage of low-cost labor to outsource jobs and undermine the bargaining power of U.S. workers, and the reluctance of U.S. policymakers to take the necessary steps to push back on these actions.

Because global trade must balance, trade surpluses in one country must be offset by deficits elsewhere. In the name of unfettered globalization that was sold as a boon to everyone, trade surplus countries with abundant low-wage workers, such as China, linked up with major American retailers to set up low-cost supply chains throughout the developing world. At the same time, American offshorers increasingly set up shop abroad, motivated by both cheap foreign labor and a tax system that rewards offshore production.

Not only did the Trump administration do nothing to push back on these factors driving the trade deficit; it made matters worse. According to Public Citizen, “At least $425.6 billion in U.S. tax dollars has gone to firms that have been certified by the U.S. government as having offshored [over 200,000] jobs during the Trump administration.” The administration opposed any efforts to boost working bargaining power that could have helped counteract the trade-induced downward pressure on wages, and its 2017 tax plan sharply increased the incentives to offshore production.

To be clear, there have been many periods when other growth factors in the U.S. economy more than offset the drag from trade deficits. Unfortunately, now is not one of those times. Unless policymakers act quickly, there will be no countervailing sources of demand to reverse the impact of Trump’s historically large trade imbalances.

The first step is a robust stimulus package to provide much-needed economic relief to the tens of millions of Americans still suffering economic hardship, while also helping to offset the drag from the trade deficit. At the same time, other recovering economies must stimulate their economies or the U.S. trade deficit will likely worsen as we once again become the driver of global consumption. If Trump had not thoroughly alienated our allies over the last four years, this is precisely the sort of coordinated policy he could have negotiated when the pandemic hit.

The next steps are to take the offshoring incentives out of the tax code, strengthen American unions, onshore vital supply chains, stand up a strong Buy American policy for government procurement, and enact strong domestic public investment in areas like clean energy to create good, green jobs while making a serious play for global market share in the production of renewable energy.

Those are all key components of the Biden agenda (disclosure: Bernstein is an informal adviser to the Biden campaign), none of which are supported by Trump or the Republicans. (A potential exception might be Trump’s on-again, off-again support for a stimulus bill, but the blockage here may prove to be Senate Majority Leader Mitch McConnell and his GOP caucus, rather than the White House.)

The bad news is that U.S. economy is currently under threat from Trump’s triple-play failure: the total absence of presidential leadership on virus control and stimulus, and a trade war that has demonstrably backfired. The good news is that we have an imminent choice to pursue a very different path on all of the above.

Dean Baker is a senior economist at the Center for Economic and Policy Research. Jared Bernstein, chief economist to former vice president Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities.

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