Leibowitz: Record Trade Deficit in August—What’s Happening?

The August trade report was released last week. It reported a trade deficit of $67.1 billion, the largest U.S. deficit in 14 years. The trade deficit for “merchandise trade” (meaning trade in goods) was at an all-time high: $83.9 billion. This result comes after nearly three years of tariffs, retaliation and trade wars. I struggled to find an explanation that would show that U.S. tariff policy is actually working to reduce the U.S. trade deficit. I’m still looking.

When you want to determine whether a policy is working, a good first step is to articulate the goals that you want the policy to achieve. Possible goals here are: (1) to bring manufacturing jobs back to the United States; (2) to change the damaging behavior of countries that do not wish us well; or (3) to reduce dependence on imports of vital goods, like food, medicine and personal protective equipment.

Reducing the trade deficit bears little obvious connection to the above goals. Even if it did, the evidence strongly suggests that the trade war is not reducing the trade deficit.

It’s necessary to drill down a bit to examine these figures. First, and perhaps most obvious, 2020 is an unusual year because of the pandemic. Economic shutdowns and lockdowns around the world have depressed foreign demand, and thereby reduced U.S. exports. In addition, the U.S. has loosened restrictions on economic activity somewhat faster than other countries. That creates demand in the U.S. for imports, which, together with reduced demand for U.S. exports in markets that are recovering more slowly, increases the potential for a larger trade deficit.

Does this explain everything? Not really. One of the less-publicized aspects of the last few years is the rapidly improving trade picture in energy. In 2019, the U.S. first exported more petroleum than it imported. One big reason is exports of oil to China. As part of the Phase One trade deal with China, that country agreed to buy about $52 billion of oil and liquefied natural gas from U.S. producers by the end of 2021. Purchases by China this year have helped balance U.S. imports and exports of oil and gas for the first time in 50 years.

Based on a rather cursory examination of industrial and agricultural numbers, year to date trade balances in oil and gas improved from a deficit of $17 billion in January-August 2019 to a surplus of $18 billion in the same months in 2020. That is a turnaround of $35 billion in one year. Yet the total goods trade deficit in January-August 2020 was only $11 billion lower than in 2020. That means that, other than oil and gas trade, the performance of the trade economy was $24 billion worse in 2020 than in 2019. No single sector was chiefly responsible for this decline in trade performance.

Second, August is only one month. In an unusual move, Trade Representative Robert Lighthizer commented in detail on the August figures; he obviously thought that the big number needed an explanation. He pointed out that the U.S. is recovering faster than other countries from the shutdown blues caused by the virus and noted a very unusual influx of gold in August, which ratcheted up the monthly deficit a bit.

Ambassador Lighthizer did not mention the rather obvious fact that the trade war tariffs on steel, aluminum, washing machines and most imports from China not only decreased imports of goods subject to the tariffs, but encouraged imports of higher-valued products not subject to tariffs, while also decreasing exports. This is because tariffs beget tariffs. U.S. levies on imports were answered by most countries with retaliatory tariffs.

Looking at the big picture, if the goals of the trade war are to bring manufacturing jobs back to the United States, that goal has not been advanced. Manufacturing employment is no greater now than it was before; nor is manufacturing activity. Would it be different if not for the pandemic? Certainly, in raw numbers. But would the big trade picture be different if both imports and exports were much higher? That is not clear.

Last week, I wrote that the steel and aluminum tariffs do not appear to be working and invited comments from readers. I got a couple—the most telling for me could be paraphrased as: “All right, wise guy—what would YOU do?”

I’ll fight the question first, and then try to answer it. I do not think it’s my job to propose a system of actions that would do a better job of solving a problem than the people in charge. Rather, it’s their job to explain why the policy actions they have chosen do work. I have already demonstrated, at least to my own satisfaction, that the actions since 2018 have not solved or even significantly reduced the larger problems. Foreign subsidies have not been reduced, nor has manufacturing returned to the United States. Some production has left China, but it has not reached these shores.

Now to my answer, for what it’s worth.

To “move the needle” on these larger problems, government at the federal and state levels needs to make the United States more attractive to foreign investment. Companies have to be made to want to come here and stay here. Imposing tariffs on imports does not accomplish this goal. Investors want to advance their goals through increased freedom, not increased restrictions. As long as the world is the way it is, we can use our power to attract investment, not repel it. Training workers to develop the skills necessary to attract investment is essential, for example.

Subsidies may be necessary or at least desirable in certain situations. Subsidies do not always violate trade rules. Nor is cheap labor always the way to win a big new plant—productivity matters. We can move the needle by asking investors what they want and trying to give them what they need to make a big decision to invest.

As before, comments are welcome.

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