Why US trade gap could obstruct Trump’s economic vision

The US trade deficit hit a four-year peak in 2016 and is posing a tough challenge to President Donald Trump’s drive to shrink the deficit, accelerate the economy and create many more jobs.
Trump’s combative stance toward America’s trading partners may not help. He has threatened to slap punitive tariffs on imports from China, Mexico and other nations deemed to be trading unfairly. If those frictions were to fuel a trade war, it could actually worsen the US trade gap.

Here is what is at stake.

What is America’s trade deficit?
The deficit measures how much the value of the goods and services the nation imports exceeds the value of its exports. For 2016, the deficit totaled $502.3 billion — the gap between $2.711 trillion in imports and $2.209 trillion in exports.

Was the 2016 deficit unusually large?
Not by the standards of recent history. But higher and higher US trade gaps have become a long-running trend. 

Why cannot the world’s biggest economy run trade surpluses — or at least smaller deficits?
That is a question Trump posed repeatedly during the campaign. He heaped blame on misconceived trade deals, which he said have exploited the US while rewarding other nations. Private economists say the answer is hardly so simple. A nation’s trade surplus or deficit, they note, reflects diverse factors, including how strong consumer spending is at home and abroad and the value of, say, the US dollar against other currencies — something the US cannot easily control. What is more, the US, as a highly advanced economy, pays higher wages than many developing nations do — a potential disadvantage on trade.

How does Trump plan to address the trade deficit?
One complaint he lodged during the campaign was that other nations, notably China, were cheating the US by manipulating their own currency to keep it undervalued. By doing so, these nations could make their goods less expensive abroad than similar American products. Trump also attacked the North American Free Trade Agreement (NAFTA), as a catastrophe, which he would renegotiate to better protect American workers and goods.
Trump has also proposed imposing punitive tariffs — as high as 45 percent — against such countries as China and Mexico if they do not stop what he calls unfair trading practices that he says have cost millions of American manufacturing jobs. Doing so, however, would likely make countless goods that the US imports from those countries — think avocados and tomatoes — far more expensive for Americans.

Do economists generally think Trump’s policies would succeed?
Many economists are worried. They say they fear that Trump’s threats would not only fail to produce more favorable trade terms for US companies and workers but also trigger tit-for-tat trade wars with other nations. Other nations could retaliate by raising the tariffs they impose on US goods.

Has this ever happened before?
Yes. Congress approved the Tariff Act of 1930, known as the Smoot-Hawley Act, to fight the effects of a deepening downturn. The law raised tariffs on imports in an effort to protect American jobs. Instead, it led other countries to retaliate, and global trade shrank. Eventually, a severe recession turned into a global Great Depression.

Could that happen again?
Most economists do not think Trump’s efforts will trigger anything like what happened in the 1930s. But there is concern that the president could incite a trade war that would harm the US economy. A more optimistic view is that Trump will use tough talk to gain trade concessions from other nations and give the US a more advantageous playing field.

Could this approach significantly shrink the chronic trade deficits?
Few think so. But if Trump could manage to forge better trade agreements, and if those deals helped increase US exports while holding down imports, the US trade gap would narrow as a result. The economy would accelerate, too. 
Trade is again expected to be a drag on the economy in 2017, but economists have forecast that other factors, including solid consumer spending, will lift the economy to growth of around 2.5 percent. 
Even stronger expansion is expected next year if Trump succeeds in winning Congress’ approval of his stimulus program of tax cuts, deregulation and increased infrastructure spending. Most forecasters think those initiatives would deliver a bigger economic boost than Trump’s efforts to shrink the trade deficit.

Source: Arab News