Forget the “wall”—it’s a trade statistic that Donald Trump has staked his presidency on.
“The jobs and wealth have been stripped from our country. Year after year, decade after decade, trade deficit upon trade deficit,” he said in October 2017. “Under my administration, the theft of American prosperity will end.”
Give the guy points for trying. Throughout 2018, the president worked to shrink the US trade deficit by imposing tariffs on a sweeping range of goods, sparking a trade war with China, and tussling with allies over trade deals.
But still, America’s deficit ballooned to $621 billion (pdf) in 2018—just more than 3% of GDP. By his own measure, Trump flunked.
Opinion writers across the country savored the irony of the president failing his own test. The New York Times’ David Leonhardt summed it up best (paywall):
“It’s a neat microcosm of President Trump’s economic policy: He picks a yardstick to measure the American economy—the trade deficit—that’s mostly meaningless. He spends years criticizing it as too high and promising to reduce it. And under his administration, it surges.”
There’s another neat microcosm going on here, though—of a problem bigger, even, than Trump’s approach to the economy.
By using the US trade deficit mainly to ridicule the president, the media consistently misleads the public on an important fact: Trump is not wrong to worry about it (even if his strategies to fix it are mostly wrongheaded). The picture of US economic activity captured in the trade balance does reveal important things about its economy’s health. One thing it’s signaling is that a vital engine of American growth and long-term prosperity is sputtering.
What the trade balance can tell us—and what it cannot
The trade balance tracks flows of payments that Americans give and receive from the rest of the world, in exchange for goods and services. The US has, since the mid-1970s, run a deficit with the rest of the world—meaning, it imports more than it exports. Many economists say that there’s nothing inherently dangerous about running a deficit.
Trump, however, seems to see the trade balance as a scoreboard, a tidy win-loss tally that reveals a nation’s global dominance. America’s deficit, he contends, is proof of foreigners stealing its jobs and factories. And in that context, $621 billion certainly does sound unsettlingly large.
Then again, a huge number of goods and services go into that calculation—cranberries, sweaters, petroleum, corn, Ivy League educations, aircraft engines, fidget-spinners, bull sperm, paintball guns, trips to Disneyland, to name a wee few.
So when Trump’s critics chide him for alarmism—dismissing his focus on trade as either based in ignorance or cynical jingoism—they have a point too. There’s just way too much noise in the trade deficit stat to deduce much about jobs and factories—let alone to justify all-out trade wars.
Drawing this broad conclusion is understandable; eliminating the noise requires combing through reams of customs codes and abstruse product names (“dobbies and jaquards,” anyone?). But could those details yield more meaningful insights about the long-term health of the American economy?
Yes, it turns out. Brad Setser, an economist at the Council on Foreign Relations and an expert on trade and capital flows, has done that brain-scalding work of digging through the trade data. And the patterns he’s uncovered lean in favor of Trump’s interpretation.
Looking at manufacturing specifically is a more telling approach
A quick glance at the trade deficit tells you that, sure, it’s now a tad bigger than it’s been in a while—but on the upside, it’s nowhere near as bad as in the early 2000s.
Setser’s calculations zero in specifically on trade in manufactured goods1. And those trends tell a very different story indeed.
The US trade deficit in those has been headed sharply south for a while now. “[Since] 2014, US manufacturing exports of all kinds, the top of the line and the lower end, have essentially stalled—[they’ve] actually fallen back a little bit as a share of the US economy,” says Setser. “We’ve never been a manufacturing exporter on par with Germany or Korea or Japan, but now we’ve really entered into a multiyear period of no growth.”
Okay, but the “manufacturing” category still includes a lot of technologically less sophisticated businesses. And as the media and politicians repeat so frequently, American manufacturing is now supposedly driven by state-of-the-art automation, which has pushed the sector as a whole toward advanced manufacturing, and away from low-skill factory jobs in apparel and furniture assembly.
So let’s have a look at a rough cut of advanced manufacturing subsectors2, which include production of the world’s fanciest engines, most sophisticated machinery, and most powerful semiconductors.
It turns out, those trends aren’t any cheerier.
In 2018, US factories exported about $720 billion worth of these advanced manufacturing products—but at the same time, Americans imported just under $1.1 trillion such goods. As a share of GDP, the trade deficit in these high-tech industries is the widest since records began in 1967.
What’s behind the shift is worrying too. One driver of this trade gap historically is that Americans keep buying more of their high-tech manufactured goods from other countries. But in the last five or so years, the imports share of GDP hasn’t much budged. Instead, it’s the slipping share of exports that’s been widening the deficit of late.
In keeping with Setser’s point, a particularly sharp deterioration of American competitiveness began in 2014. But this trend isn’t new, even if the decline has been uneven. As a share of the US economy, exports of high-tech goods peaked back in the late-1990s.
All of this should alarm the American public. The industries that are struggling to compete globally just so happen to form the core of America’s long-term economic dynamism.
Why manufacturing exports are particularly important to the US economy
Historically speaking, the planet’s richest countries (aside from those with oil and other resources) have tended to share one key thing: the ability to make sophisticated, technologically advanced products—cutting-edge gizmos like excavator engines or high-end medical devices. Developing these capabilities, says Setser, is critical to sustaining growth and boosting people’s living standards.
One crucial reason likely lies in the unique way advanced manufacturing fosters vibrant local economies that support middle-class societies. For one thing, manufacturing jobs tend to be much better paid than service work. But the effects are broader than that. By developing a skilled local labor force, factories give rise to new businesses in the area and attract new talent, creating dense industrial ecosystems of suppliers of parts and services, and R&D facilities. As such, industrial clusters also act as crucibles of innovation.
On the flip side, recent research into what’s called “economic complexity“—a measure of the mix of products an area makes—suggests that places with less complexity suffer from slower growth and wider gaps between rich and poor (after controlling for income, eduction and other factors).
That’s why looking more closely at the trade deficit does reveal something worrying about the US economy, even if the general measure is too broad to explain much. While the US’s knack for industrial innovation has long buoyed American prosperity, the trade data hint it’s been sinking rather steadily for a while now.
And that competitive edge, once lost, might be hard to get back. “The way I think of it is as follows,” says CFR’s Setser. “If you don’t make the current generation of aircraft or microprocessors or medical devices, the odds that you will know how to make the next generation go down.”
