(What's Left of) Our Economy: Cutting Manufacturing Trade Deficit Can Help Trump Meet Growth Target
Great Recession, manufacturing, recovery, Trade, Trade Deficits, Trump, {What's Left of) Our Economy
President Trump has long spoken of juicing still sluggish U.S. economic growth by raising tariffs on imports and thereby replacing the foreign products Americans buy with counterparts made at home. Hopefully, he'll follow through one of these days, because some economic data I've just looked over shows that his instincts are spot on, especially concerning the domestic manufacturing sector. Specifically, the figures make clear that, throughout the current, inadequate recovery, immense and steadily rising trade deficits in industry have crippled its production rate.
According to official data, between 2009 (the year the recovery began) and 2016 (the last full year for which numbers are available), the manufacturing trade deficit soared from $457.21 billion to $868.48 billion (a new all-time high) in pre-inflation terms. That's not far from a doubling. So cumulatively, it was up by $411.27 billion.
And what's happened to manufacturing output during that period? In pre-inflation value-added terms (measure that aims to eliminate various forms of double-counting), it grew by $448.5 billion. As a result, all else equal, if the manufacturing trade shortfall in 2016 was simply where it was in 2009, industry's growth would have nearly doubled.
Of course, all else is never equal, and it's reasonable to argue that the manufacturing trade and output numbers were thrown off early in the recovery by the unusual, and unusually deep, nature of the recession that preceded it. For the Great Recession was not only devastating for a cyclical industry like manufacturing. It devastated trade flows, too, because so much of it affected global finance (because global finance's weakness were so largely to blame for its outbreak).
But it's possible to correct to some extent for this unusual distortion by looking at the statistics starting in 2011 – when some degree of economic normalization had returned. (And yes, I know that massive government stimulus was largely responsible.)
During those years, the manufacturing trade deficit rose by just under $196 billion. Manufacturing output in current dollar value-added terms was up by just under $268 billion. So the growth drag was still powerful.
It remains too early in the current year to come to any definitive conclusions about these relationships under Mr. Trump. But so far, the evidence isn't very promising. On a year-to-date basis through July, the manufacturing trade deficit is running 7.04 percent above last year's record level. And through July, inflation-adjusted manufacturing production was only 1.49 percent higher than its level the previous July. (August's year-on-year figure was a slightly better but still meh 1.63 percent.)
It's possible, of course, that if they pan out, the new U.S. investments promised under President Trump will boost manufacturing output without dramatic changes in trade policy. But it's just as possible that many of these new factories and other facilities have been promised in order to escape the effects of the tariffs Mr. Trump has threatened. Indeed, that's what the CEOs of several of the companies involved have said.
If so, the longer the President waits to Make Trade Policy Great Again, the less credible his pronouncements will seem. And an opportunity both to speed up growth and improve its quality (by obviating some of the need for either deficit-ballooning tax cuts or deficit-ballooning spending increases) will be squandered.