The fourth quarter (and therefore full-year) 2019 U.S. economic growth statistics are now in, and they’re chock full of results showing that President Trump’s promise to strengthen the American economy in part by reducing the trade deficit is being fulfilled.
To be sure, this conclusion needs several important qualifications. Notably, today’s report on the gross domestic product (GDP) from the Commerce Department is preliminary. It’ll be revised twice in the next two months alone. Further, the trade data the report contains aren’t all shaped by government trade policy decisions alone. For the numbers include the flows of services and oil trade, which are rarely dealt with in trade agreements or similar trade-related measures.
Even so, the new figures entitle the President and his supporters to take at least a slow, or partial, victory lap.
In the first place, the pre-inflation GDP data show that the overall U.S. trade deficit did indeed fall in 2019. The annual decline wasn’t much – 0.97 percent. But it marked the first yearly decrease in this number since 2016’s 0.19 percent. And it looks even better in the proper context – i.e., seen against the backdrop of changes in the GDP themselves.
After all, trade deficits often (but not always) fall for bad reasons – specifically, a shrinkage in America’s output that slashes the economy’s demand for foreign goods and services. That, however, wasn’t the story in 2019. Although the trade gap narrowed slightly, the overall economy expanded by 4.12 percent. That’s considerably faster than in 2016, when growth was only 2.69 percent. And remember – the trade deficit decrease was faster.
When examined after factoring in inflation (the GDP numbers most closely followed by students of the economy), the results don’t endorse the Trump trade approach quite so strongly. But they’re unmistakably encouraging.
In these real terms, the trade deficit rose by 3.72 percent last year (from $920 billion to $954.2 billion). This increase, however, was the slowest annual increase since 2013 (when the gap actually shrank by 6.30 percent). Even better, real economic growth in 2019 still totaled 2.33 percent. In 2013, it was only 1.84 percent.
Those results still don’t look like great news for backers of the President’s trade policy, for they indicate that making significant progress in lowering the trade deficit was at least associated with a very sluggish economy.
Yet if you take a longer view, and recognize that longstanding trends in an economy as gigantic as America’s don’t turn around overnight, the picture looks more encouraging.
The table below shows the relationship in recent years between the annual change in after-inflation (“real”) GDP and the annual change in the real trade deficit. The year 2011 is the chosen baseline because that’s when the current economic recovery settled into a reasonably normal state following the unusually deep dive it took during the Great Recession and the not surprisingly strong rebound it enjoyed during the subsequent expansion’s early stages. Low deficit-growth-to-economic growth ratios identify years during which the constant dollar GDP was able to expand without a major widening of the trade gap, and high ratios reveal the opposite situation. (Negative ratios demonstrate an economy that grew while the trade shortfall actually shrank.)
Another way to think of the matter: When the economy grows faster than or just about as fast as the trade deficit, it’s making progress toward self-sufficiency – a goal that most economists disdain (at best), which that arguably is better for the nation than growth strongly dependent on a still-dangerous and/or slow-growing world. And when the growth of the trade deficit is compared with economic growth, it’s clear that the Trump administration has made major headway on this score.
ama years real GDP growth real trade deficit growth ratio
10-11: 1.55 percent 0.83 percent 0.54:1
11-12: 2.25 percent 0.01 percent 0.04:1
12-13: 1.84 percent -6.30 percent -3.42:1
13-14: 2.53 percent 8.33 percent 3.29:1
14-15: 2.91 percent 25.01 percent 8.59:1
15-16: 1.64 percent 8.61 percent 5:25:1
16-17: 2.37 percent 8.43 percent 3.57:1
17-18: 2.93 percent 8.26 percent 2.82:1
18-19: 2.33 percent 3.72 percent 1.60:1
Under the Obama administration, for three years, the economy managed to grow in after-inflation terms while the after-inflation trade deficit fell overall. Unfortunately, the growth itself was unimpressive. During its last three years, GDP expanded faster (especially in 2014 and 2015). But the trade deficit rose considerably faster still. So the U.S. economy became more dependent on that dicey world.
During the three full Trump years, the economy’s growth rate has been a bit stronger than under the last three Obama years. But the growth rate of the trade deficit has been a good deal slower. And although the overall economic growth rate has slowed slightly overall between 2017 and 2019, the growth rate of the trade deficit has been more than halved.
Similar trends are apparent from examining a different measure – the real trade deficit as a share of the gross domestic product. As shown by the table below, notable progress was made during the first three Obama years below in reducing both that actual percentage, its growth rate, and the ratio between the economy’s inflation-adjusted growth and the growth of its inflation-adjusted trade shortfall as a share of GDP.
During the next three Obama years, these trends generally shifted into reverse. But although the inflation-adjusted trade deficit as a share of real GDP has continually risen during the first Trump years, its own growth rate has weakened significantly even as growth itself has remained solid and impressive compared with the growth rates of those three final Obama years.
real trade deficit/GDP real GDP real trade deficit ratio
2011: 3.59 percent 1.55 percent -1.10 percent -0.71:1
2012: 3.51 percent 2.25 percent -2.23 percent -0.99:1
2013: 3.23 percent 1.84 percent -7.98 percent -4.34:1
2014: 3.41 percent 2.53 percent 5.57 percent 2.20:1
2015: 4.15 percent 2.91 percent 21.70 percent 7.46:1
2016: 4.43 percent 1.64 percent 6.75 percent 4.12:1
2017: 4.69 percent 2.37 percent 5.87 percent 2.48:1
2018: 4.94 percent 2.93 percent 5.33 percent 1.82:1
2019: 5.00 percent 2.33 percent 1.21 percent 0.52:1
Unfortunately, we’ll have to wait a few days to judge how the Trump administration has performed in terms of loosening the link between economic growth and that portion of the trade deficit most directly affected by trade policy. I call it the Made in Washington trade deficit, and as stated above, it consists of the total deficit minus trade in services and oil. Here’s how those figures luck (including the inflation-adjusted Made in Washington deficit).
Obama years real GDP real Made in Washington deficit ratio
10-11: 1.55 percent 11.92 percent 7.69:1
11-12: 2.25 percent 10.23 percent 4.55:1
12-13: 1.84 percent 6.15 percent 3.34:1
13-14: 2.53 percent 15.85 percent 6.26:1
14-15: 2.91 percent 22.70 percent 7.80:1
15-16: 1.64 percent 2.54 percent 1.55:1
16-17: 2.37 percent 6.64 percent 2.80:1
17-18: 2.93 percent 13.15 percent 4.49:1
18-19: 2.33 percent 4.54 percent* 1.95:1
It’s evident from here that the portion of the trade deficit most directly affected by trade policy has grown much slower during the Trump years than during the Obama years, even though Trump growth on average has been somewhat stronger. In fact, during the only two Obama years in which that Made in Washington trade deficit increased nearly as slowly as during any of the Trump years (2013 and 2016) were years in which that growth was weak (less than two percent). Annual economic growth during the Trump years has never sunk to that level, or even close.
So no one should imagine that, even by its own standards, the Trump administration has made nearly enough progress in either reducing the trade deficit, or increasing the economy’s self-sufficiency. But although the numbers themselves say nothing about the value or dangers of greater self-reliance, they make clear that it’s happening, and that much of the progress has taken place where trade policy matters most.