Why Trump’s Intense Focus on the Trade Deficit Could Cost the Economy in the Long Run

A soybean field in Indiana. Selling more commodities like soybeans to the Chinese would make U.S. farmers happy, and reduce the trade deficit, but would not accomplish much more than that.
Credit...Daniel Acker for The New York Times

The Great Sino-American Trade War of 2018 has fizzled, at least for now. Global markets rose Monday after the Trump administration, at least for the time being, backed away from its threat to impose tariffs on Chinese imports.

But as negotiations proceed, a big question for the administration remains. Is the goal to make some supporters in farm states and energy extraction industries happy, and shrink the trade deficit temporarily?

Or is it to reset a dysfunctional economic relationship between the world’s two biggest economies, in hope of ensuring that the United States maintains competitive footing in the industries of the future — even if dividends aren’t immediate?

Over the weekend, Mr. Trump’s team de-escalated the trade war while seemingly choosing Option A.

The problem with this strategy is not just that the trade peace might prove less than durable. It also creates a risk that after all the bluster and threats of the last few months, there will be no payoff in terms of solutions to bigger, longer-term problems.

The president has made reducing trade deficits a primary goal of international economic policy, ignoring mainstream economists who see trade deficits as more a consequence of investment and savings decisions than a scorecard of national success. To that end hehas demanded that the Chinese work to reduce the $335 billion trade deficit by $200 billion.

A joint statement from American and Chinese negotiators emphasized “meaningful increases in United States agriculture and energy exports.” Treasury Secretary Steven Mnuchin on Monday emphasized the potential for China to buy liquefied natural gas. And the president tweeted that under a potential deal, China would buy “practically as much as our Farmers can produce.”

If those purchases materialize, there could be political dividends for the president. American farmers have much to lose from a potential Chinese trade war, and stepped-up Chinese purchases of American soybeans and other commodities could be a boon. If those purchases are large enough to move the dial on the overall trade deficit with China, it will create an easy-to-measure win for the president on his pet issue.

“This is the stuff you can count and measure,” said Gary Clyde Hufbauer, a trade scholar with the Peterson Institute for International Economics. “It’s short term, and instantaneous.”

The administration’s approach might quickly reduce the headline level of the trade deficit, but it largely ignores the frustrations of American sectors that are the most promising sources for creating future good export-related jobs.

American companies that make automobiles, semiconductors and other complex products bemoan Chinese government requirements that force American firms to form joint ventures with Chinese companies, sharing their technology. The U.S. companies accuse those partners of widespread theft of intellectual property as the Chinese try to catch up in advanced technologies. Many American firms face Chinese competition that receives heavy state subsidies.

These are some of the most stubborn, longstanding issues in American-Chinese economic relations. But they aren’t likely to be fixed overnight, and even if the United States wins concessions, it won’t necessarily affect the trade deficit — especially in the next couple of years.

This helps explain why some prominent advocates of a tougher stance toward China — who applauded President Trump’s tariff threats — are critical of the turn the negotiations have taken.

The tariffs the president threatened “are designed to address China’s technology theft and their plans to dominate advanced and high technology manufacturing,” said Dan DiMicco, chairman of the Coalition for a Prosperous America, which advocates a hard-line stance, in a statement. By contrast, “an agreement to sell agricultural and energy commodities is the result of bad negotiating and bad economic strategy.”

Exports of agriculture were directly or indirectly responsible for 524,000 jobs in 2014, according to analysis by the International Trade Administration; petroleum and coal products were responsible for an additional 255,000. But combined that is less than 7 percent of the jobs tied to exports that year.

Sectors like computers and electronic products and machinery were responsible for substantially more export-related jobs.

Mr. Hufbauer notes similarities with a strategy that American trade negotiators pursued with Japan in the 1980s, of “voluntary import agreements” in which the Japanese agreed to import more American semiconductors and other products.

Whatever the near-term benefits for particular American exporters, Japanese trade surpluses kept rising.

In some ways the back-and-forth with China in recent days fits a common Trump negotiating pattern: Threaten bold, potentially disruptive action while making major demands, then seek a deal that is considerably more incremental.

Even some who are critical of the administration see value in more systemic rethinking of the relationship between the United States and China.

“Trade is not stuff of immovable structural forces of globalization,” said Jennifer Harris, a fellow at the Roosevelt Institute and former State Department official. “These are political choices that were made, and they could be unmade. So I disagree with a lot of the specific policy choices, but I at least appreciate the space Trump is opening up for us to remind ourselves how much agency we have.”

But, she added, in this round of negotiations “it’s not clear what we’re getting for a lot of the concessions that have been made.”

The Trump administration negotiating team has deep internal fissures, and this is an area where the hard-liners, including U.S. Trade Representative Robert Lighthizer, are advocating the path that includes the highest risk of near-term economic disruption but also the greater likelihood of shifting the Chinese-American economic relationship in the longer run.

The thing to watch in the weeks ahead is whether the administration faction seeking short-term wins and trade peace continues to prevail.

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