Both as a candidate and a president, President Trump decried trade deficits.
While he is not the first to bemoan deficits nor will he be the last, Trump made taming them a key part of his campaign.
On that score, he will have failed. The three largest U.S. deficits in history will have occurred during the Trump Administration.
But his complaints about trade deficits are largely due to a misunderstanding of how international trade works. It led him and his trade advisors to a misguided decision to shift to bilateral deals and away from the multilateral focus that had largely been in place since the end of World War II and an equally misguided understanding of what trade deficits represent and how they occur.
The truth is, deficits should be expected to increase over time as overall trade increases. In the simplest terms, it means U.S. consumers and businesses are buying, leading to increased imports.
And that’s precisely what happened in the first years of the Trump presidency. In three of Trump’s four years in office, the U.S. trade deficit will have topped $800 billion for only the second time ever. It also happened during the presidency of George W. Bush.
But there’s one important difference. During the three years in the Bush Administration when the deficit topped $800 billion, overall U.S. trade set successive records, including topping $3 trillion for the first time.
During the Trump administration, by way on contrast, trade will have fallen in two of the three years when the U.S. deficit topped $800 billion, including most precipitously in 2020.
The current record trade deficit was set in 2018, at $878.68 billion. That was, in fact, a record year for trade, the first above $4 trillion.
But U.S. trade, while remaining above $4 trillion in 2019, fell — and the deficit fell to $853.23 billion. In 2020, trade will have fallen again, but this time below $4 trillion, when the annual statistics for 2020 are released in three weeks.
The deficit will not have fallen and will almost certainly set a record.
The deficit topped $800 billion through the first 11 months of 2020 for only the second time in history, according to U.S. Census Bureau data released last week. (The first time was in 2018, the record year for both overall trade and the deficit.)
The 2020 deficit total will almost certainly surpass the 2018 record, probably winding up somewhere between $880 billion to $895 billion.
The growth in the trade deficit will not be with China, with which the United States has its largest deficit by far and which led to a trade war soon to enter its third year. For the second consecutive year, the U.S. deficit with China, while still nearly three times the size of the U.S. deficit with any other country, will decrease.
As I have covered previously, the U.S. deficit is growing rapidly because of increasing deficits with Vietnam and Mexico, because of increasing imports of manufactured goods relative to U.S. exports to those nations, and increased imports of gold from Switzerland, representing a skittishness in financial markets about the U.S. economy, particularly in late spring.