U.S. Posts Record Annual Trade Deficit

WASHINGTON—The U.S. posted its widest monthly trade gap since 2008 in December and a record annual deficit in goods as sturdy economic growth underpinned higher spending by American consumers and businesses.

.. Over the course of 2018, Mr. Trump imposed tariffs on a range of goods that the U.S. imports from other countries, particularly China, in hopes of giving American producers a competitive edge. He publicly lambasted companies that outsourced jobs, renegotiated pacts with major U.S. trade partners like Mexico, Canada and South Korea, and rankled longtime European allies by deeming their steel and aluminum exports a threat to national security.

Still, the trade gap swelled 12% from 2017 to $621 billion. Excluding services that the U.S. sells to foreigners, such as tourism, intellectual property and banking, the deficit grew 10% to $891.3 billion, the largest level on record.

Economists say the shortfall was fueled, ironically, by another Trump administration policy: tax cuts and spending increases that juiced demand from U.S. consumers and businesses at a time when growth in the rest of the world was slowing. Concern that the U.S. economy could overheat prompted the Federal Reserve to raise interest rates four times in 2018, contributing to a strong dollar in the second half of the year that made foreign goods relatively cheap for Americans

As a result, U.S. imports grew 7.5%, while exports increased just 6.3%.

“Higher take-home incomes for households have definitely proven to be very conducive to imports,” said Pooja Sriram, an economist at Barclays. “The outcome has been in almost the opposite direction of what the administration has wanted.”

U.S. imports of consumer goods last year jumped 7.7% to $647.9 billion, fueled in part by a 22% rise in inbound shipments of drugs. Industrial supplies like fuel and crude oil were another driver of the trade gap, with imports rising 13% from 2017 to $575.7 billion.

Highlighting the limitations of Mr. Trump’s trade policies, the goods deficit widened most with China, the U.S.’s largest commercial partner and the main focus of White House efforts. That is partly because Chinese authorities responded to tariffs by drastically scaling back their country’s purchases of key U.S. exports like soybeans, cars and metals, production of which is concentrated in states that Mr. Trump won in the 2016 election.

U.S. goods exports to China fell 7.4% in 2018 to $120.3 billion, while imports from China grew 6.7% to $539.5 billion as Americans increased their purchases of electronics, furniture, toys and other products.

.. But deficits do subtract from gross domestic product, and the widening of the trade shortfall at the end of 2018 was a factor in slower U.S. growth in the fourth quarter.
.. “Trade now looks set to be a more serious drag in the first quarter,” Mr. Hunter said in a note to clients. He estimates annualized GDP growth will slow to just 1.5% in the first three months of 2019, down from 2.6% in the fourth quarter.

China Prepares Policy to Increase Access for Foreign Companies

Some U.S. officials are likely to see Beijing’s move away from its controversial Made in China 2025 policy as more cosmetic than real

.. Odds that the new plan will go far enough in addressing U.S. complaints are long. President Xi and others in the Chinese leadership are used to exercising a strong hand in the economy. Many bureaucracies and state-owned enterprises benefit from the unfettered access to resources that come with big government initiatives and so don’t want to be hampered by the greater competition of a level playing field.

.. Officials in the Trump administration have called Made in China 2025 a threat to fair competition, saying it encourages state subsidies for domestic companies and forces technology transfer from foreign partners. Some U.S. officials are likely to see the changes as more cosmetic than real
.. A key concession under consideration would be dropping the numerical targets for market share by Chinese companies, these people said. Made in China 2025 sets defined goals of raising domestic content of core components and materials to 40% by 2020 and 70% by 2025, an increase that comes at the expense of foreign competitors.

.. President Xi’s economic adviser, Vice Premier Liu He, and other senior officials have criticized Made in China 2025 for creating waste. Cheap loans made available by various levels of government, for example, have led to extreme overcapacity among electric-vehicle battery makers in the past couple of years, making the sector less viable.

.. The Trump administration has pushed the “competitive neutrality” principle, making sure that it was part of the renegotiated North American Free Trade Agreement, known as the U.S.-Mexico-Canada Agreement. Under the concept, governments are prohibited from favoring state-owned companies over privately owned ones.

.. The idea was a favorite of prior U.S. administrations as well and became part of the Trans-Pacific Partnership

.. Vice Premier Liu, has told his U.S. counterparts, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, that China is planning to reduce auto tariffs and boost purchases of soybeans and other crops.

 

.. But the U.S. wants structural issues like Made in China 2025 and other policies addressed in any full trade deal.

.. “Any progress on addressing global concerns regarding the Made in China 2025 plan should be benchmarked not against new slogans and broad formulations,” said Jeremie Waterman, president of the China Center at the U.S. Chamber of Commerce. “It should be benchmarked against very detailed concerns regarding subsidies, standard setting, procurement and others.”

 

Trump’s North American Trade Charade

US President Donald Trump’s goals in renegotiating the North American Free Trade Agreement were to reduce the current-account deficit and restore US manufacturing jobs. But the new United States-Mexico-Canada Agreement fails on both counts and will reduce US employment and weaken American producers’ position in international markets.

.. Meanwhile, US tariffs on imported steel and aluminum from Mexico and Canada remain in place.
.. Among other things, the USMCA will limit the number of vehicles that can be imported into the US, which effectively opens the door to managed trade. It is not yet clear how import quotas will be allocated; but almost any quota-allocation system will stifle competition and innovation by favoring incumbents over new market entrants.
.. Trump’s stated goals in renegotiating NAFTA – if “renegotiation” is the right word for when a bully attacks his smaller neighbors until they accede to his demands – were to reduce the bilateral US trade deficits with Canada and Mexico and “bring good jobs back home.” By those criteria, the new agreement is a spectacular failure. As any economist knows, a deficit in goods and services is a macroeconomic phenomenon reflecting a country’s domestic expenditures and savings. For the US to shrink its overall deficit, it must either reduce expenditures or increase savings. Nothing in the USMCA does that.

.. Moreover, the deal will probably destroy more US jobs than it creates. The new rules-of-origin (ROO) benchmark requiring that 75% of an imported vehicle be produced in North America (up from 62.5% under NAFTA) is likely to reduce employment by raising the costs of production.
.. In fact, automakers in Asia and Europe are probably ecstatic at the prospect of increased sales. They have gained an edge over North American producers in third countries, and perhaps even in the US market itself.
.. As for foreign-owned automakers operating in the US, they will almost certainly offshore any facilities that are producing inputs destined for foreign markets. This diversion, combined with the higher price of cars in the US, will further reduce overall US auto production, and thus auto-sector employment.
.. even if US parts producers were to expand production, they would be inclined to automate as much of it as possible, rather than hire more workers.

.. One of NAFTA’s major benefits was that it allowed for integrated supply chains across North America. US automakers gained access to labor-intensive parts at lower cost from Mexico, and Mexican producers gained access to less expensive capital-intensive parts from the US. As a result, the North American auto industry improved its competitive position internationally. The USMCA will not destroy NAFTA’s efficient supply chains, but it will raise their costs, thus undercutting that advantage.

.. in the long run, it will likely

  • reduce US employment,
  • shrink North America’s share of the global auto market, and
  • undermine America’s credibility on international trade issues –

all while failing to reduce the US current-account deficit.

.. other governments will now have to ask themselves why they should negotiate with a country that tears up settled agreements at will.

.. Even if forcing friends and allies to the negotiating table actually benefited US trade, it still would not be worth the loss of US soft power.

 

Canada relieved trade deal done, won’t forget Trump attacks

“The most important gain from this agreement is retaining our access to the U.S. market and Canadians understand that,” Freeland said.
But there is a widely shared belief that Canada made concessions and the U.S. did not.
“The concessions were all from Canada and Mexico,” MacKay said. “All of them. The only thing that the United States gave up was more demands.”

.. Roland Paris, a former foreign policy adviser to Trudeau, expressed relief that the deal is done but worried about the long-term relationship between the two countries.
“Canadians won’t forget Trump’s disgraceful treatment of Canada. Our economic partnership has been reaffirmed, but trust can’t be rebuilt with the stroke of a pen,” Paris tweeted.

.. Canada could have lost 60,000 jobs in a trade war and taken a 1 percentage percent hit to its GDP — a significant drop because Canada’s economy is projected to grow just 2 percent next year

.. Ontario’s auto industry faced the biggest threat, but the sector welcomed the new agreement. The deal requires that 40 to 45 percent of a car’s content be built where workers earn $16 an hour. That is meant to bring production back to the United States or Canada and away from Mexico, where auto workers earn on average just $4 to $5 an hour.

.. The agreement also potentially restricts Canada and Mexico from reaching a free trade agreement with China and other “non-market” countries. If Canada or Mexico signed a deal with China, the U.S. could terminate its trade agreement with Canada or Mexico on a six-month notice. That may pose a problem for Canada which is eager to diversify its trade.

“It’s bizarre,” Charest, the former Quebec premier, said. “I have never seen anything like that in a trade agreement.”
Daniel Ujczo, a trade attorney with the Dickinson Wright law firm, said Canada and Mexico also must give the U.S. notice before starting those trade discussions and updates of all proposals made during the negotiations.

“The clause achieves a key policy imperative for the US; namely, shutting China’s backdoor to North America through Canada and Mexico,” Ujczo said. “Japan and Europe, as well as the rest of the world, should be on notice that this may be the price of admission to a trade deal with the U.S.”

.. “I am a Canadian. I am polite and respectful. Even when I’m dealing with a hard business issue I don’t belittle people, I don’t insult them,” Rosen said. “As a Canadian, the whole approach that has been taken (by the U.S.) has been offensive and I don’t think Canadians will forget it.”

.. Trump’s mistreatment reinforces a worry among Canadians that their much larger neighbor is taking advantage of Canada, Heyman added.
Bothwell, the University of Toronto professor, warned of lingering damage to relations.
Trump treated it like a real estate deal when he was a shyster in Atlantic City,” Bothwell said.
“But this is nation to nation. And that’s different. And it’s connected to other things,” he added. “Trump really doesn’t grasp that and doesn’t care.”

IMF Chief Lagarde Says Economic Outlook Is Dimming

International Monetary Fund Managing Director Christine Lagarde is raising alarm bells about the health of the global economy, saying international growth may have plateaued.

“For most countries, it has become more difficult to deliver on the promise of greater prosperity, because the global economic weather is beginning to change,” Ms. Lagarde said in a speech in Washington on Monday.

.. While other emerging-market currencies, from Indonesia’s to South Africa’s, have also experienced difficult declines this year, most emerging markets have avoided the acute turmoil of Turkey and Argentina.

If the crisis spreads, as some fear, capital could flood out of emerging markets, Ms. Lagarde warned, saying that IMF economists had estimated emerging markets could face up to $100 billion in portfolio outflows. In recent years, about $240 billion per year had flowed into those countries, so a $100 billion outflow would be a dramatic reversal.

.. Ms. Lagarde said another mounting concern is that threats to impose new trade restrictions have been carried out in a number of countries.

“A key issue is that rhetoric is morphing into a new reality of actual trade barriers,” Ms. Lagarde said. “This is hurting not only trade itself, but also investment and manufacturing as uncertainty continues to rise.”

.. countries have continued to pile on debt, which has tended to foretell slower growth in years ahead as the burden of debt service mounts. The total debt of the private sector has reached an “all-time high of $182 trillion,” Ms. Lagarde said, noting that the figure was 60% higher than in 2007.

 

How Trump Survives

NBC News and the Wall Street Journal polled his job approval. There was no appreciable change.

.. Why? The most important reason has to be the remarkable state of the American economy. On Election Day 2016, the Dow Jones Industrial Average closed at 18,332.43. On August 29, it closed at 26,124.57. That is an increase of some 40 percent. Other indices show similar gains. Growth in GDP went from 1.5 percent in 2016 to 2.3 percent in 2017 and, helped by the excellent 4.2 percent number in the second quarter, is forecast for around 3 percent in 2018.

.. The fact that presidents are not responsible for the economy does not stop the public from assigning them blame or credit. And Trump deserves some credit. His pro-business attitude stirs the bulls’ animal spirits. His deregulatory and tax policies contribute to growth. Trump understands that he is riding the bull — and that his following will be strong for the duration of the journey.

.. The economic boom is crucial in understanding why Trump enjoys the 88 percent approval among Republicans that keeps him politically viable.
.. Trump continues to goad, highlight, and benefit from an antagonistic news media. The overwhelmingly negative coverage of Trump paradoxically works to his advantage by driving his supporters to rally to his side. When the press gets a story wrong, Trump is vindicated. His voters have less reason to trust the elite media institutions they see as allied against them in a struggle over American identity.
.. Media obsession with Trump and scandal helps the president in other ways. For one, the scandals are confusing and increasingly self-referential. Only political professionals and junkies can keep track of them. The headlines run together. The talking heads are background noise to men and women outside the bubble.
.. The media fixation hands Trump the initiative. Because so much of the news is based on his Twitter feed, he can create storylines — and spark confusion and outrage — with the push of a button. This ability lets him shift attention from current controversies by creating fresh ones. The ongoing hysteria lessens the cost to Trump of each bad story. It also allows him to portray media institutions and figures as insiders contemptuous of Trump voters and eager to overturn the result of a presidential election.

Democrats — and most Republicans for that matter — have yet to grasp the ideas of political economy that Trump intuits: government that privileges American citizens through

  • tight labor markets,
  • border security,
  • trade reciprocity, and
  • entitlements.

.. Nor do Democrats understand that American populism is not simply economic. It is cultural. It has long been associated with traditional values and practices, an unreconstructed patriotism, and support for law and order. No matter how well Democratic proposals might test, the party will not succeed at the national level unless it addresses and mollifies the social concerns of the white working class. Pelosi, Schumer, and Sanders have not tried.