Measuring Trade Policy Success

Measuring Trade Policy Success

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The deficit [i.e. trade balance] needs to go in the right direction. Manufacturing as a share of GDP needs to go in the right direction.

The "right direction" is presumably down for the trade deficit and up for manufacturing as a share of gross domestic product. With respect to the trade deficit, this has long been a Trump obsession. He has one narrative-the United States as a victim of unscrupulous foreign competitors stealing American jobs; one metric-the trade deficit; and one tool-tariffs. While he seems concerned about the trade deficit, he attacks it via individual countries, particularly those with which we have the largest deficits-China, Canada, Mexico, Japan, Korea, Vietnam, and the European Union. This is a case where the whole is, in fact, the sum of the parts, so a piecemeal approach makes sense.

Whether it is the right policy goal, however, is a different question. Most economists would argue that the trade deficit is an accounting identity that simply shows domestic investment exceeds savings, which means capital is coming in from outside the country. That could be a sign of confidence in the economy-that investment in the United States is attractive-or a sign that the domestic savings rate is low, meaning that we are overconsuming, or simply a sign of strong domestic economic growth. Two of those are good things, and history shows that the best way to reduce the deficit is to have a recession (or a pandemic), which is exactly what happened in 2008-2009. That reduces consumption and increases savings. I don't recommend that as a policy.

Trump is also fixated on manufacturing, particularly old-fashioned "heavy" manufacturing. To be fair, so was Biden. Both were children of the 1950s, growing up in an era of mass production of steel, other metals, autos, and machinery that provided good jobs for millions of Americans. It seems the Trump administration wants to take us back to that, a daunting task since 75 percent of our economy is now services.

Despite its transition to a services economy, the United States continues to be a manufacturing powerhouse. The United States is producing more stuff than ever, but it is doing it with fewer people, which explains why the issue is so politically sensitive. Manufacturing jobs peaked in 1979 and have been declining ever since, until recently, when they have begun to stabilize. Last year, they represented only 8 percent of U.S. employment.

As Ed points out in his column, manufacturing's share of U.S. GDP has declined from 9.8 percent last year to 9.4 percent in the first half of this year, so if this is Trump's metric, he's not off to a good start. Similarly, the trade deficit in goods looks like it will exceed $1 trillion this year and will be more than last year, although that reflects significant stockpiling early in the year in anticipation of the tariffs. So, also not a good start.

Good start or not, these are the wrong goals. The trade deficit is not a good measure of economic vitality, and the United States long ago moved away from manufacturing as a creator of jobs. Changing either at the margin-which is the best Trump will be able to do-will not make much difference.

The appropriate macroeconomic goals are the basics-increasing GDP growth, reducing inflation, and creating new jobs. Looking at trade specifically, the appropriate domestic goals are exploiting our comparative advantages, promoting exports, which neither the current administration nor the last one seemed interested in, improving supply chain resilience, and growing domestic capacity in national security-critical areas. (For the record, that does not include kitchen cabinets and bathroom vanities, among others.) The latter two-resilience and security-are recent additions to the list, brought in because of our experience during Covid-19 and the challenge China presents both economically and militarily. They are different from the others because they are not efficiency-based. In fact, they cost money and make our economy less efficient, but they are necessary in light of the current global geopolitical situation.

One other goal, abandoned by the current administration, is support for the rules-based trading system. I have ranted about this in the past. Suffice it to say, trade, by definition, transcends borders, and having a system of rules in place for everybody has proved to be beneficial for the United States even when some of its consequences don't go our way. A future column will discuss this and other global commons issues and why respect for them should be an important U.S. policy goal.

William A. Reinsch is senior adviser and Scholl Chair emeritus with the Economics Program and Scholl Chair at the Center for Strategic and International Studies in Washington, D.C.