This morning’s monthly U.S. trade figures (for March) enable an update for the economic impact of President Trump’s tariff-centric trade policies – and contain very good news both for Mr. Trump and for anyone hoping that the nation’s growth becomes healthier (which should be all Americans).
The major test, as RealityChek regulars know, is a comparison between the economy’s overall growth on the one hand, and the growth of the trade shortfall most heavily influenced by trade policies. The latter can be termed the “Made in Washington trade deficit,” since it strips out oil (which is rarely the object of trade deals or trade policy decisions) and services (where trade liberalization has made only limited progress).
If the economy is growing faster than this non-oil goods deficit (in inflation-adjusted terms – the gauge most closely followed by economy watchers), or if its growth rate is still slower but the gap between these rates is narrowing, that means that its expansion is at least starting to stem more from domestic production, and less from import-led (and therefore debt-financed) consumption. If the trends are showing the opposite results, then overall growth is becoming still more heavily reliant on credit-financed shopping (whether by households, businesses, governments or some combination of these).
And in case you forgot, that’s the kind of growth that led directly to the last global financial crisis and the worst American recession since the Great Depression. And even though the economy began recovering a decade ago, its expansion consistently trailed the growth rate of the Made in Washington trade deficit – and never more than when the inflation-adjusted gross domestic product was increasing most robustly.
That’s why the new U.S. trade figures are so encouraging. They confirm that the American economy recently has been able to grow impressively without supercharged Made in Washington trade deficits. In fact, that’s way understating the case. For calculations based on the March trade results show that, during the first quarter of this year, the after-inflation Made in Washington trade deficit actually shrunk sequentially (by a 6.09 percent annual rate) while real gross domestic product increased by a healthy 3.13 percent annualized.
Nor was the first quarter a fluke – at least not under the Trump administration. In the second quarter of 2018, the real Made in Washington trade shortfall sank sequentially by 5.90 percent annualized, while the overall economy surged by a price-adjusted 4.10 percent.
And an examination of the two during the current economic recovery produces an unmistakable pattern, which is best illustrated by looking at the far-right column (think of it as the multiple) of the table below: During the Trump years so far, good growth has resulted despite relatively modest increases (and, as we’ve just seen, despite some absolute declines) in the Made in Washington trade deficit. During the Obama years, Trump-like growth was only achieved when the Made in Washington trade deficit practically exploded. And when that trade deficit grew weakly, so did the gross domestic product.
Further, even though the multiple rose between the first and second years of the Trump administration, the quarterly 2018 figures show that this problem stemmed from the tariff front-running of the third quarter – when U.S. importers were scrambling to bring in products from abroad before they were hit with levies, principally on goods from China. Once this period of distortion ended, the multiple fell significantly (and probably overshot in the first quarter of this year).
Real Made in Washington trade deficit Real GDP Ratio of first to second
1Q 2019: -6.09 percent 3.13 percent -1.95:1
4Q 2018: 6.41 percent 2.15 percent 2.98:1
3Q 2018: 11.66 percent 3.31 percent 3.52:1
2Q 2018: -5.90 percent 4.10 percent -1.44:1
1Q 2018: 1.35 percent 2.20 percent 0.61:1
2018: 12.74 percent 2.86 percent 4.45:1
2017: 6.75 percent 2.22 percent 3.04:1
2016: 2.66 percent 1.57 percent 1.69:1
2015: 22.63 percent 2.88 percent 7.86:1
2014: 15.88 percent 2.45 percent 6.48:1
2013: 6.15 percent 1.84 percent 3.34:1
2012: 10.23 percent 2.25 percent 4.57:1
2011: 11.92 percent 1.55 percent 7.69:1
2010: 30.71 percent 2.56 percent 12.00:1
Another way to compare the Obama and Trump years in this respect: As previously noted on RealityChek, the constant dollar 3.21 percent GDP growth registered between the first quarter of 2018 and the first quarter of 2019 was the best such four-quarter growth stretch since the second quarter of 2014 and the second quarter of 2015 (when real growth was 3.37 percent).
Yet during that Obama high growth period, the real Made in Washington trade deficit shot up by 18.83 percent. During the Trump high growth period, this trade shortfall rose by only 4.99 percent.
The higher and broader tariffs on China threatened by the President to press Beijing in the current trade talks would represent the biggest test yet of the Trump policies’ impact on the health of America’s growth. But the March trade figures are the latest evidence that so far, they’ve passed such tests with flying colors.