fb-pixel Skip to main content
Evan Horowitz | Quick Study

The biggest barrier to President Trump’s plan for cutting the trade deficit? It’s Trump

America’s trade deficit continues to grow, even as President Trump escalates a trade war with China and advances his “America first” vision of global trade.

This doesn’t necessarily count as proof Trump’s methods are ineffective. Tariffs can work, and brinkmanship helped seal a new NAFTA deal.

But there’s a powerful figure standing between Trump and the lower trade deficit he has promised: a national leader who has successfully implemented policies all but certain to make America’s trade deficit worse.

Yes, that would be Donald Trump.

In other words, it’s Trump the tax cutter versus Trump the anti-free-trade crusader, and so far the tax cuts are winning. They have stimulated the economy in a way that actually helps foreign companies, increases imports, and generally makes it harder for US manufacturers to compete.


Before we get to the nitty-gritty of how Trump may have encircled himself, consider the big picture.

The overall US trade deficit in goods and services rose 8.6 percent from January to August this year, compared with the same time frame last year. And that took place despite the fact 2018 has brought tariffs against China, far-reaching steel and aluminum tariffs, and narrower levies on washing machines and solar panels.

Focus just on manufacturing, and it’s even clearer the wheels are turning backward in the effort to revitalize “made in America” businesses. The trade deficit in manufactured goods has increased 13.9 percent so far in 2018. That growing gap holds true across the board. From textiles and apparel to metal products, machinery, and electronics, there isn’t a single part of the manufacturing economy where US exports have kept pace with foreign imports.

Which is not to say that US manufacturers are in dire straits. They have added nearly 170,000 workers this year, and total exports have increased. But there’s been an even larger increase in the demand for foreign manufactured goods. And that’s really what the trade deficit is all about: Are we buying more from the rest of the world (deficit) or is it buying more from us (surplus)?


That brings us to this question: Why are imports rising faster than exports, even as Trump’s tariffs are making it costlier to bring goods into the United States? Tax cuts are a big part of the answer.

For one thing, those tax savings put extra money in people’s pockets and on businesses’ ledgers — a chunk of which got spent on goods from around the world, whether it be clothing, computers, or cars.

Translation: higher imports.

Since none of America’s trading partners enacted any kind of comparable stimulus, there was no similar spike of interest in US exports from consumers in Europe or Asia.

Also, the short-term stimulus from tax cuts probably quickened the pace of interest rate hikes by the Federal Reserve, which acted to ensure the economy didn’t overheat. But that spells trade trouble, too, because rising interest rates attract foreign investors, who convert their money to dollars to earn better returns in the United States.

And watch what happens next: The growing demand for dollars drives up the value of US currency. That’s terrible for the trade deficit, because it makes American goods more expensive overseas, and foreign goods cheaper here.

It’s the opposite of the charge often leveled against China. In the past, the Chinese government has kept the yuan artificially low as a way to make that country’s goods cheaper in foreign markets, thus boosting exports. Today, thanks in part to tax cuts, the value of the US dollar has been climbing, which makes US goods pricier around the world.


Fit all these pieces together and you can see why Trump is struggling to deliver on his promise to reduce the trade deficit. American households and domestic businesses have more money to spend on imports, and the strong dollar makes those foreign imports especially affordable.

Now, it’s worth noting that this isn’t necessarily a bad thing. A rising trade deficit may suggest that US companies are struggling to compete on the global stage, but at the same time US consumers enjoy a bounty of relatively low-priced goods from around the world. That benefit shouldn’t be ignored.

There’s also a chance this whole situation is about to change. Trump’s most dramatic moves against China didn’t take effect until late September, so it’s possible the trade deficit will start shrinking in the months ahead.

For now, however, there seems to be a contradiction at the heart of Trump’s policy platform, in which efforts to limit imports via tariffs are overmatched by the import-boosting effect of last year’s tax cuts.

Or, as international economist Brad Setser from the Council on Foreign Relations recently put it: “Trump’s stimulus — and the still relatively strong dollar — are making German and Chinese exports great (again).”


Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the nation. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz.