One way to increase the American economy’s demand — or the power to buy things in the economy, which is something that most workers (their wages largely stagnant) could have used much more of in the last 40 years — is through lowering the trade deficit. A trade deficit is currently reducing demand because that gap in American spending is creating jobs and demand in a foreign country such as China instead of the U.S.
Lowering the trade deficit to 1 percent of GDP from 3 percent of GDP would grant about the same increase to demand as a $400 billion stimulus package would.
Trump told his working-class voters that he’d improve trade inequities and therefore help them by reducing the trade deficit, which of course like many of his declarations turns out to have been a sham.
The latest data from the Commerce Department shows that the trade deficit rose again in 2018. The full–year trade deficit was $621.0 billion (3.0 percent of GDP), up from $552.3 billion in 2017, and from $502.0 billion in 2016, the last year of the Obama presidency. If we pull out oil and other petroleum products, the trade deficit looks even worse, increasing by more than $77 billion from 2017 to 2018.
The picture doesn’t look any better if we look at the specific countries that Trump has vilified. The trade deficit in goods with Mexico has increased by $17.6 billion or 27.5 percent since Obama left the White House in 2016. The deficit with Canada, Trump’s “enemy“ to the north, has increased by $8.8 billion, an increase of 80.0 percent. The trade deficit in goods with China has risen by $72.2 billion since 2016, an increase of 20.8 percent.
The new China agreement does almost nothing about currency values, the most important determinant of the trade balance. After running around the country for two years complaining about China’s currency “manipulation,” there are no provisions in his new pact that would force China to raise the value of its currency against the dollar.
The sharp rise in the trade deficit in the last decade had a devastating impact on manufacturing workers and whole communities in large parts of the Northeast and the Midwest. We can’t hope to reverse this damage, as those jobs will not come back.
However, we could design a trade policy that would move us toward more balanced trade and create millions of relatively good-paying manufacturing jobs. Unfortunately, Trump’s policy seems to be going in the opposite direction.