Making News: New Op-Ed on Why Trump is Still Winning on Trade

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aluminum, China, Making News, manufacturing, metals, steel, tariffs, The Washington Times, Trade, Trade Deficits, trade wars, Trump

I’m pleased to announce the publication of a new freelance article of mine.  This morning, The Washington Times posted my op-ed explaining why the huge increase in the monthly and annual U.S. trade deficits reported on Wednesday masked some surprising trends.  Specifically, the data made clear that President Trump’s trade policies continue progressing toward their two of their biggest goals.  Click here to read.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

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Making News: Video of Today’s CNBC Segment on Today’s U.S. Trade Figures Now On-Line!

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American Enterprise Institute, CNBC, James Pethokoukis, Making News, tariffs, Trade, Trade Deficits, Trump

This morning I got a short notice invitation to appear on CNBC to dissect the new U.S. trade figures and explain the message they’re sending us about President Trump’s tariff-heavy trade policies.  There were so many numbers to crunch beforehand that I didn’t have a chance to send out a heads-up.  But since the network does a great job of archiving segments (and making them available for free), you can see the conversation (also featuring James Pethokoukis of the American Enterprise Institute) at this link.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: New U.S. Trade Figures Start Creating a Trump China Scorecard

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China, exports, goods trade, imports, manufacturing, merchandise trade, tariffs, Trade, Trade Deficits, {What's Left of) Our Economy

After a roughly month-long shutdown-related delay, the latest U.S. monthly trade figures were finally released this morning – bringing the story up only through November. But although they’re clearly somewhat dated (especially considering how fast China trade-related events are moving), they reveal some noteworthy China-related developments and point to some equally noteworthy potential China-related trends.

The new trade report makes clear that, at least through November, President Trump’s tariffs, and possibly the threat of more, are influencing trade flows. And there’s even some evidence that, although the U.S. bilateral goods deficit that so bothers Mr. Trump is moving in the wrong direction, the underlying trends are much more favorable. Here’s what I mean.

It’s true that, on a year-to-date basis, the American goods deficit with China is up considerably. In fact, the 10.90 percent widening of this gap during this period is the biggest since the same period between 2010 and 2011 – when the U.S. economy was conclusively moving out of recession, and the deficit jumped by 22.38 percent.

But the November monthly figures point to a more complicated picture, especially keeping in mind that two big sets of U.S. tariffs have been imposed on goods imports from China since last July.

For example, despite widespread reports of tariff “front-running” late last year aiming at avoiding future levies, the U.S. merchandise trade deficit fell on a monthly basis by 12.16 percent – from $43.01 billion in October to $37.86 billion. Yes, the October trade gap represented the fourth straight monthly record high. But the November drop was the biggest overall since last February’s 18.61 percent. And the November total was the lowest since August’s $38.57 billion.

Moreover, because U.S.-China trade is so seasonal (think, in large measure, “Christmas”), it’s instructive to compare last November’s results with its most recent predecessors. And this exercise reveals that the sequential deficit decline was the biggest November monthly decrease since recessionary 2008’s 17.41 percent.

A similar pattern emerges for exports. America’s goods sales to China in November fell sequentially by 5.10 percent, from $9.13 billion to $8.66 billion. That’s the lowest such level since May, 2016 ($8.54 billion) and the lowest November level since recessionary, 2009 ($7.37 billion). And the monthly November merchandise deficit decrease was the biggest since recessionary 2008’s 14.83 percent. Interestingly, though, last November’s monthly export drop was smaller than October’s (6.73 percent).

Goods imports from China were off markedly as well – by 10.93 percent sequentially in November, from October’s all-time high of $52.23 billion. The $46.53 billion November total was the lowest since last July’s $47.10 billion.

In addition, the monthly decrease was the biggest since last February’s 14.68 percent, and the biggest November fall-off since 2008 (16.95 percent).

But U.S. policy’s effectiveness can’t accurately be evaluated unless the China trade flows are examined in the context of broader American economic trends and in particular manufacturing trends – since bilateral trade flows are so manufacturing-heavy. And what the key numbers suggest is that, even though the merchandise deficit with China has grown rapidly and indeed is heading for an all-time annual record, American industry is starting to reduce its dependence on Chinese parts, components, and other inputs.

The main evidence is the relationship between the growth of U.S. manufacturing production on the one hand, and the growth of U.S. goods imports from China on the other. If the resulting ratio is rising, then so is that U.S. dependence. If it’s falling, the reverse would seem to be true. So here are those figures for the first eleven months of each year going back to 2010-11, when the current U.S. economic recovery finally showed some real legs. (Incidentally, RealityChek regular may recall a similar exercise last November regarding American manufacturing’s growth and the global manufacturing trade deficit.)

2017-18: 4.64:1

2016-17: 3.41:1

2015-16: the deficit fell by 5.94 percent while manufacturing grew an inflation-adjusted 0.03 percent.

2014-15: the deficit fell by 7.21 percent while manufacturing shrank an inflation-adjusted 2.02 percent

2013-14: 4.18:1

2012-13: 4.66:1

2011-12: 3.18:1

2010-11: 7.80:1

According to the above table, U.S. manufacturing’s dependence on Chinese inputs has grown faster between the first eleven months of 2016-17 and the first eleven months of 2017-18. But the latest year-to-date results are much lower than those for 2010-11. And this year’s numbers are probably also inflated by that tariff front-running. We’ll know more as the figures for the next few months come in, but with the possibilities live both of tariffs going up and coming off, definitive conclusions still look pretty far off.

(What’s Left of) Our Economy: The Wrong Kinds of Records Revealed in October’s U.S. Trade Figures

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China, exports, goods, imports, manufacturing, services, Trade, Trade Deficits, trade war, {What's Left of) Our Economy

October was a month of records, this morning’s U.S. trade figures revealed – and the most noteworthy weren’t the good kind.

All-time highs in two intertwined trade gaps in the news lately stand out: in U.S. goods trade with China, and in manufacturing trade.

October’s U.S. merchandise trade deficit with China hit its fourth straight monthly high – $43.10 billion. And the 7.11 percent sequential increase seemed largely to reflect continued evidence of importers striving to keep ahead of looming tariff increases promised by President Trump (and only partly and temporarily headed off by this past weekend’s announcement of a bilateral trade truce). American purchases of goods hit their second straight monthly record – $52.23 billion.

The story on the goods exports side reflected trade war-related developments as well, as U.S. merchandise sales to China slumped 6.73 percent sequentially, to $9.13 billion – their lowest level since August, 2016 ($9.37 billion).

On a year-to-date basis, American goods imports to China are up 8.26 percent, while exports have dipped by 0.96 percent. As a result, the merchandise trade deficit is running 11.38 percent of last year’s record pace, and with two data months left in this year, a new all-time high seems certain.

U.S. manufacturing trade, which is strongly influenced by U.S.-China trade, in October recorded its first monthly trade deficit topping $100 billion. The $102.11 billion gap represented a strong 18.95 percent increase from September’s $85.84 billion total, and exceeded the previous record of $92.51 billion (set in August) by 10.38 percent.

On a monthly basis, manufactures exports rose by 3.37 percent, from $97.18 billion to $100.44 billion. But imports surged by 10.67 percent, from $183.02 billion to $202.54 billion.

Year-to-date, the manufacturing trade shortfall is up 11.93 percent, from $761.44 billion to $852.31, and as a result, seems sure to hit the $1 trillion mark this year for the first time.

Manufacturing exports so far have increased by 6.65 percent between the first ten months of last year and the first ten months of this year. But the much greater amount of manufacturing imports has swelled by 9.06 percent.

The combined U.S. goods and services October trade deficit of $55.49 billion represented only a 1.71 percent increase from September’s upwardly revised figure of $54.56 billion. But the October total was the highest yet during the current economic recovery – eclipsing the $54.96 billion level of this past February.

The goods deficit, meanwhile, hit its all-time high in October ($78.11 billion), topping the previous record of $77.63 billion set in July, 2008 – shortly after the start of the last recession.

Overall October U.S. imports of $266.53 billion were a new record, too. Oddly, they came in below September’s previously reported $266.58 billion, but that number was revised down this morning.

Also at all-time records in October were U.S. goods imports ($219.59 billion) and services imports ($46.95 billion).

Year-to-date, the combined goods and services trade deficit is up 11.36 percent over last year’s January-October total. Total exports are up 7.68 percent but total imports have climbed by 8.38 percent.

(What’s Left of) Our Economy: Early Signs of Manufacturing Trade Progress Under Trump

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manufacturing, manufacturing production, manufacturing trade deficit, Trade, Trade Deficits, Trump, value added, {What's Left of) Our Economy

Since President Trump has focused so much of his trade policy on reducing America’s enormous and chronic deficits, it’s not surprising that the press has noted that, under his presidency so far, the trade gap has widened.

And oddly, in one respect, they just got some data showing that in the one area where the President had been able to claim progress (but hasn’t to my knowledge) – slowing growth in the deficit despite accelerating growth in the economy as a whole. As of the last monthly U.S. trade figures, the trend has once again gone south, though the economy’s still strong growth plus a stronger dollar – which makes American-origin goods and services more expensive than their foreign counterparts – are no doubt overwhelmingly responsible.

But a closer examination of the statistics reveals an important new front on which Mr. Trump’s efforts appear to be succeeding – manufacturing trade, which still dominates overall U.S. trade flows. Specifically, signs have emerged that, under his administration, domestic manufacturing is regaining the ability to boost output without relying more and more on inputs from foreign factories (which of course boost the trade shortfall) In fact, during the Trump administration’s first full data year, American manufacturing’s production has grown faster than its trade deficit – indicating that domestic goods have been replacing imports. And this progress has been made despite a speed-up in manufacturing production growth, and that stronger dollar.

Continuation of this trend would be great news for the nation’s economy. Further, it would represent a major departure from the record of the previous administration, during which the growth of the manufacturing trade deficit vastly exceeded industry’s own growth.

Actually, manufacturing trade deficit has been greatly outgrowing the sector’s output for nearly twenty years. In 2000, the trade gap represented 25.54 percent of total domestic manufacturing production (according to an output measure called value added). As of the second quarter of this year (the latest available data), that figure stood at 42.02 percent. In absolute terms, the trade gap increased by a factor of 2 and a half, while manufacturing production grew by a little over 50 percent. (All figures are stated in pre-inflation dollars.)

But this manufacturing trade deficit’s “out-performance” really took off during the Obama years. Let’s give the former President’s trade record a break by throwing out the data for the first year of the economic recovery (and his first year in office). After all, the global trade contraction during the last recession was so dramatic that the trade “snapback” effect once the recovery began was unusually strong, and couldn’t last.

From 2010 through 2016, however, while American manufacturing output advanced by 16.04 percent, the manufacturing trade deficit jumped by 52.47 percent. That’s more than three times faster. In fact, between 2015 and 2016, the manufacturing trade deficit increased by 3.23 percent even though manufacturing output actually fell by 1.78 percent.

Between 2016 and 2017 (the Trump administration’s first year), the manufacturing trade deficit rose less than twice as fast (7.31 percent) as industry’s output (4.53 percent). And I don’t think it’s coincidence that this manufacturing growth rate represented the best annual performance since that first recovery year of 2009-2010 (5.58 percent), which was surely strengthened by the aforementioned snapback effect.

We only have partial 2018 figures, of course, but they show even more improvement along these lines. Between the second quarter of last year and the second quarter of this year, manufacturing output was up a sizzling 8.08 percent. But the manufacturing trade deficit grew more slowly – by 7.83 percent. That combination hasn’t been seen since 2012-2013, when industry’s output improved by 3.36 percent while the trade gap widened by only 0.77 percent.

The following year, though, manufacturing’s trade shortfall soared more than four times faster than its production. For all I know, this coming year could be a repeat of that depressing precedent. For now, however, it’s definitely evidence that the Trump trade and manufacturing policies are winning.

(What’s Left of) Our Economy: Why Trump is Making Headway on Trade Deficits

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China, Made in Washington trade deficit, Obama, recession, recovery, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

Given that two of President Trump’s main trade policy aims have been to reduce the gargantuan U.S. global trade deficit and the comparably huge trade gap with China, it’s been entirely predictable that the chortlers are out with claims that he’s failing on both grounds. (See, e.g., here and here.)

What’s just as predictable? The chortlers are missing the main story: On both fronts, Mr. Trump’s first full year in office (the time-span for which the latest complete data are available), showed noteworthy progress. The main evidence? For both the world as a whole and for China, U.S. trade shortfalls grew more slowly during his first full year in office, even as the American economy grew faster.

As standard economic theory holds, that’s not supposed to happen. Quite the opposite: As growth speeds up, all else equal, trade deficit increases should be expected, as the growth boosts purchases of imports.

As RealityChek readers know, this pattern has been broken often in recent decades. And Trump Year One is an example, especially when the trade flows most heavily influenced by trade policy decisions are examined.

By that I mean what I call the Made in Washington trade deficit – the gap resulting by measuring imports and exports while stripping out oil and services, because trade liberalization in those sectors is in its infancy.

The contrast between the first full Trump year and the previous comparable period (the baseline for which came during former President Obama’s final year in office) is especially instructive. From the second quarter of 2016 to the second quarter of 2017, the Made in Washington trade deficit grew 1.72 times faster than the gross domestic product (GDP) in pre-inflation terms, and the China merchandise deficit grew 1.65 times faster.

Yet from the second quarter of 2017 through the second quarter of 2018 (using the latest GDP figures available), the Made in Washington shortfall increased only half (0.49 times) as fast as the economy overall, while the China goods deficit increased 1.33 times faster than GDP.

Moreover, the first Trump year compares well with the entirety of the current economic recovery, which of course began in mid-2009, early in the first Obama term. We can toss out the results from the second quarter of 2009 to the second quarter of 2010, since the second quarter of 2009 marked the end of the previous recession. But from second quarter 2010-2011 to second quarter 2016-2017, the Made in Washington trade shortfall grew as slowly compared with the economy as it did during the first Trump period only once – from the second quarter of 2010 to the second quarter of 2011 (0.44 times faster). In fact, between the second quarters of 2013-2014, and 2014-2015, this trade shortfall surged by 4.68 and 4.07 times faster than growth.

The relative growth rate of the U.S. goods trade deficit with China diminished during the first full Trump year as well – from 1.65 times faster than the economy, to 1.33 times faster.

On China trade, the immediate pre-Trump years overall look more impressive in comparison with the first full Trump year, but hardly in a slam dunk way. Between second quarter 2010-2011 and second quarter 2016-2017, the China shortfall grew slower compared with growth than it did during the first Trump year three times (2012-2013, 2013-2014, and 2015-2016) and faster the other four years.

It’s completely legit to criticize Mr. Trump’s focus on the global trade deficit or the China trade deficit or any trade deficit (although I regard such criticism as wrong for various reasons, including the one analyzed here). And it’s completely legit to criticize other elements of the Trump trade policies (as I have numerous times – e.g., here and here). What’s not legitimate, though, is to accuse the President of failing to make headway in his trade deficit reduction goals – unless you have no interest in the most pertinent facts.

(What’s Left of) Our Economy: What John Oliver Didn’t Tell You About Trade – or About RealityChek

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"Last Week Tonight, BMW, bubble decade, China, consumer prices, domestic content, Financial Crisis, Global Imbalances, Jobs, John Oliver, manufacturing, Peter Navarro, productivity, tariffs, Trade, Trade Deficits, Trump, wages, {What's Left of) Our Economy

In his segment last night on President Trump’s trade policy, HBO Will Rogers wannabe John Oliver had some good fun at my expense due to a technical glitch here on RealityChek, and I deserved it. In the course of making the case why Mr. Trump’s tariff-centered approach is dangerous economic Know-nothing-ism, the (profanity-philic) comedian argued that the President’s main trade adviser, Peter Navarro, once cited me as one of only two economists that agree with his views on the harm of trade deficits – and then correctly pointed out that I told an inquiring journalist soon after that I don’t hold an economics degree. (I recounted these events in this post.)

Oliver proceeded to go on to suggest that I don’t hold a degree in website design, either (and maybe nothing else?), spotlighting the RealityChek bio section where my portrait hasn’t been rotated correctly. And to that I plead “guilty.” I’m a stubborn techno-phobe and have never managed to figure out how to present the photo rightside up. But first impressions are important, and I should have somehow taken care of it. So my bad.

Oliver deserves credit on two other counts as well. First, he acknowledges that trade policy is complicated, and that unfettered trade can have major downsides. Indeed, he even specifies that for trade’s overall net gains to be realized, it needs to be “done right,” and that valid grounds exist for complaints about China’s trade policies in particular. Second, he asked one of his producers to check whether or not I still lack an economics degree.

But what’s also noteworthy (and not so commendable) about that instance of meticulousness is that, although this producer and I wound up having a fairly lengthy conversation about trade policy, my only “contribution” to the show was strengthening Oliver’s attack on Navarro. And that’s really too bad for anyone seeking genuinely to understand the pros and cons, and ins and outs of trade policy. Because had Oliver and his staff gone beyond my bio page, here’s some of what they would have found:

>Despite Oliver’s claim that tariffs are to be avoided in large part because they make goods for consumers and producers who use the tariff-ed products more expensive, there’s little evidence that, in today’s U.S. economy, many producers have the pricing power to pull this feat off. For that, you can thank a combination of the lingering impact of the last financial crisis and ensuing Great Recession (which resulted in part from American leaders ignoring the huge, trade-centered global imbalances that were building up during the bubble decade). And let’s not forget the longer-lasting wage stagnation that’s afflicted so much of the American labor force (which can also be blamed in part on trade policies that have exposed this workforce to penny-wage foreign competition and/or predatory practices by low- and high-wage foreign competitors alike).

>Although Oliver contends that Trump-like concerns about trade policy’s impact on U.S. domestic manufacturing overlook how much larger American industry is today than in 1984, during the current economic recovery, after-inflation manufacturing output has yet to regain its pre-recession production levels. And perhaps not so coincidentally, all the while, the manufacturing trade deficit has surged to the point where it’s likely to hit $1 trillion this year (in pre-inflation dollars). In other words, that’s a lot of American demand for manufactured products that was supplied from foreign economies rather than from the U.S. economy. 

>Oliver accepts as gospel the view that manufacturing’s recent employment losses are due mainly to the sector’s productivity gains, not to failed U.S. trade policies. But industry’s productivity performance has been so poor for so long that it’s lost its historic role as the country’s labor productivity growth leader. Further, it’s anything but difficult to find highly credentialed economists who finger inadequately dealt-with foreign competition instead.

>Oliver makes much of how Mr. Trump’s tariffs on steel and aluminum will cost many more jobs than they save or create by observing that they will harm metals-using industries – which employ many more Americans than the metals producers. Yet since the metals tariffs began to be imposed, these sectors have experienced growth and employment gains at least as strong as those of the rest of manufacturing.

>Like so many journalists, Oliver describes BMW as an American manufacturing gem because it builds so many of its vehicles in South Carolina – and an example of how the Trump trade approach simplistically assumes that domestic and foreign companies can be easily distinguished. Like many journalists, however, Oliver ignores readily available U.S. government data making clear that BMW in the United States mainly snaps together foreign-produced parts and components, and therefore adds relatively little value to the American economy.

>According to Oliver, Trump’s metals tariffs are also boneheaded because they are “pissing off the leaders of every other country on earth” and therefore sandbagging any hope of prevailing in trade diplomacy against the world’s main metals trade bad guy, China. Too bad he never mentioned that, as China’s metals glut ballooned, the United States emerged as far and away the world’s metals dumping ground of last resort because other metals-producing countries responded to Chinese pressure on their own industries either by transshipping Chinese metals, or stepping up their own exports to the United States to compensate. I.e., a global problem required a global response. P.S.: The world’s leading economies have been vowing to work on multilateral responses to China’s overcapacity for nearly two years, and have produced exactly nothing in the way of concrete results.

>Most disappointing, I asked Oliver’s fact-checker why her boss puts so much stock in economists’ views when nearly all of them (including those so confident in orthodox trade theories and their policy implications) clearly flunked the biggest test they’d faced in decades: warning that the economy of the previous decade was an immense bubble whose bursting would bring disaster. Or figuring out that anything was fundamentally wrong with the American economy in those years. Her response: Many of them did – which will come as a major surprise to anyone in the mid-2000s who owned a home or a share of stock.

There’s more, but let’s close with this irony: Even though Oliver made much of China’s decision to impose some retaliatory tariff on U.S. goods, in contrast to a Navarro prediction, a team of high level Chinese negotiators will arrive in Washington, D.C. in a few days to try and end a trade confrontation that has hammered their country’s stock markets and currency, and that, according to numerous reports, has President Xi Jinping worried that he’s overplayed China’s economic hand. Any chance that any of this upcoming highlight of this week’s news will be reported on the next edition of “Last Week Tonight”?

(What’s Left of) Our Economy: The New York Fed Whiffs on Tariffs and Trade Policy

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China, currency manipulation, imports, intermediate goods, New York Fed, non-tariff barriers, subsidies, tariffs, Trade, Trade Deficits, Trump, Trump tariffs, value-added tax, VAT, {What's Left of) Our Economy

Do you want to know how slipshod a new post from the New York branch of the Federal Reserve on tariffs and trade deficits is? I’m not a Ph.D. economist, and it took me about thirty seconds to spot no less than four fatal flaws.

The post, written by a senior Fed economist and three academic colleagues (including one from a Chinese university), argues that President Trump’s tariff-heavy trade policies are likeliest to backfire on the administration and the entire U.S. economy by widening, not narrowing, the country’s trade deficit. Their main evidence? The experience of China after it entered the World Trade Organization (WTO) at the end of 2001.

According to the authors:

“While more costly imports are likely to reduce the quantity and value of imports into the United States, the story does not stop there, because we cannot presume that the value of exports will remain unchanged. In this post, we argue that U.S. exports will also fall, not only because of other countries’ retaliatory tariffs on U.S. exports, but also because the costs for U.S. firms producing goods for export will rise and make U.S. exports less competitive on the world market. The end result is likely to be lower imports and lower exports, with little or no improvement in the trade deficit.”

The Chinese example, they claim, supports this hypothesis because China significantly reduced its tariffs following WTO entry (i.e., pursued a policy exactly the opposite of that sought by Mr. Trump), and both its exports as well as its imports soared. Moreover, the authors found that

“Focusing on China’s exports to the United States…shows that by lowering its own tariffs on imported inputs, China reduced its production costs and increased productivity, enabling Chinese firms to enter the U.S. export market and compete with other firms. With a fall in production costs, Chinese firms charged lower prices on goods exported to the United States and increased their U.S. market shares.”

But the weaknesses in this analysis are positively jaw-dropping. First, the data supporting that latter key finding is no less than a dozen years out of date.

Second, the post completely fails to take into account the possible effects over time of a U.S. failure to provide trade protection for sectors, like steel, that represent key inputs for manufacturing. Although obviously the cheaper they are, the more competitive the industries that utilize them will be, intermediate goods sectors (including not only materials like metals but machinery and equipment of all kinds) could represent as much as nearly half of America’s entire manufacturing complex. Should the United States just sit back and watch those sectors trashed by foreign competition?

Third, and even more important, should the United States accept this result if much of the foreign competition faced by its manufacturers is predatory? In this vein, the Fed post contains not a single word about China’s currency manipulation – which kept the value of the yuan significantly and artificially suppressed throughout the early post-WTO admission years (and arguably still does) for reasons completely unrelated to trade liberalization, and which gave Chinese products a major and wholly artificial advantage in China’s own market, the U.S. market, and markets around the world.

Fourth, the authors similarly ignore the impact of China’s value-added tax (VAT) system, which not only surrounds the entire Chinese economy with high, tariff-like walls that nonetheless aren’t technically considered tariffs, but which provides comparably impressive subsidies for China’s exports.  Not to mention the other massive supports Beijing offers to manufacturing, or its still (and perhaps increasingly) formidable array of non-tariff trade barriers.

Indeed, all these non-market practices no doubt largely explain why China has both supercharged its exports since it entered the WTO and impressively raised the levels of Chinese inputs they contain. 

In baseball, three strikes means “you’re out.” At the New York Fed, by contrast, four strikes apparently earns a “well done.”

(What’s Left of) Our Economy: The Real Trade Messages of the New GDP Report

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exports, GDP, Great Recession, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, real exports, real imports, real trade deficit, recovery, tariffs, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

Friday’s government report on U.S. economic growth in the second quarter of this year was a treasure trove of newsworthy information. It not only provided the first peak at how President Trump’s imposed and threatened tariffs have affected the nation’s economic performance. It also incorporated literally decades’ worth of revisions that contained some important surprises about the economy’s strengths and weaknesses – in particular over the last five years. These new findings entail considerably more than trade, but let’s focus on that subject for today, since it’s been making so many headlines.

As widely expected, these new figures on the gross domestic product (GDP) and how it changed in inflation-adjusted terms showed that the threatened tariffs and retaliatory levies boosted American exports significantly. The reason? Many foreign customers for U.S. goods decided to “front-load” their purchases to avoid the paying the new charges for as long as possible.

On a sequential basis, this first of this year’s three estimates for the second quarter judged that U.S. merchandise exports jumped by 8.96 percent on an annualized basis. That’s the biggest such increase since the 11.72 percent surge in the fourth quarter of 2013. At the same time, the contribution to total quarterly growth made by goods exports was nothing special. In fact, at 1.12 percentage points out of the quarter’s 4.10 percent annualized rate of inflation-adjusted expansion, they fueled less real growth relatively speaking than they did in the fourth quarter of last year, when they were responsible for 0.79 percentage points of that period’s 2.30 percent annualized constant dollar growth.

Interestingly, the tariffs didn’t result in U.S. customers of overseas producers displaying the same interest in maximizing their imports to the greatest possible extent. Indeed, these purchases inched up sequentially by only 0.12 percent at an annual rate after inflation. Yet at $3.4241 trillion after inflation and annualized, they set a new record, nosing out the previous quarter’s $3.4201 trillion.

Thanks to exports’ performance, which brought their quarterly total to a new record ($2.5742 trillion annualized in real terms) as well, the inflation-adjusted trade deficit plummeted by 23.27 percent annualized to $849.9 billion. (The absolute numbers are different from those reported in previous RealityChek posts because the new GDP report is presenting the inflation-adjusted figures using 2012 dollars, not 2009 dollars.) That quarterly trade shortfall was the nation’s smallest since the $845.9 billion annualized recorded in the third quarter of last year. And the sequential decrease was the biggest since the 36.96 percent nosedive in the fourth quarter of 2013.

In addition, according to the revisions, America’s trade performance between the fourth quarter of 2012 and the second quarter of this year was considerably worse than previously estimated. Combined goods and services exports rose a bit faster (at a 2.6 percent rather than a 2.5 percent average annual pace in real terms). But total import growth was much stronger during this period – a 4.2 percent average annual increase in constant dollars rather than 3.7 percent growth.

Trade deficits have therefore been higher than previously judged. Again, the changeover from reporting the figures in 2009 dollars to using 2012 dollars makes comparing the old and new levels pointless. But the difference can become clear by examining these deficits as a share of the total economy. Here are the previously reported percentages:

2013: 2.59 percent

2014: 2.67 percent

2015: 3.31 percent

2016: 3.51 percent

2017: 3.64 percent

And here are the revised data:

2013: 3.23 percent

2014: 3.42 percent

2015: 4.17 percent

2016: 4.45 percent

2017: 4.76 percent

Last year’s level was the highest for any year since 2007’s 5.27 percent – just before the Great Recession struck. It’s still a far cry from the historic quarterly high of 6.10 percent, set in the fourth quarter of 2005. But the trend shows that the real trade deficit has been climbing steadily toward these heights.

In fact, during the first quarter of this year, the overall real trade deficit hit 4.92 percent of GDP, before falling back to 4.59 percent in the second.

The revised GDP figures also shed new light on trade’s drag on economic growth during this sluggish recovery. Before this revision, the increase in the constant dollar trade deficit since the expansion began, in the middle of 2009, had sliced $302.1 billion off of the economy’s cumulative inflation-adjusted growth through the second read on first quarter GDP. That amounted to a trade drag of 9.99 percent.

With the revision in place, the trade drag as of the first quarter’s final read was $457.2 billion – or 14.33 percent. The decline in the price-adjusted trade gap as of Friday’s first read on second quarter GDP pushed the drag down to twelve percent. But that figure still represented $404.7 billion in lost real growth.

The growth drag created by the increase in the Made in Washington trade deficit has been much bigger. Before the new GDP revision, the growth of this trade shortfall (which is comprised of constant-dollar trade flows heavily affected by trade policy and trade agreement, and therefore leaves out trade in oil and services) had cut cumulative recovery era growth by 17.37 percent in real terms, or $523.88 billion, as of the final first quarter figures.

It won’t be possible to calculate revised figures for the first quarter and new figures for the second quarter until this Friday, when we’ll get the next monthly trade report (for June).

(What’s Left of) Our Economy: The IMF (Unwittingly) Explains Why Trade Deficits Really Do Matter

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China, current account, current account surplus, current deficit, Germany, Global Imbalances, globalization, IMF, International Monetary Fund, Japan, tariffs, The Netherlands, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

One of my greatest professional disappointments has been my failure to help make many converts to the idea that one of the biggest – and possibly the biggest – reason that trade deficits matter a lot (contrary to the insistence of most economists) is that they can lead to global financial crises like the one that struck in 2007 and 2008. The idea is that these deficits lay at the heart of the broader economic imbalances run up during the previous decade – which flooded borrowing- and spending-happy economies (especially America’s) with oceans of cheap credit, and inevitably produced the reckless use of such credit and the inevitable – and terrifying – bursting of the resulting bubbles.

You see? It’s a thesis that’s tough to summarize briefly – even though it’s widely accepted by some of the world’s leading economists, who nonetheless remain reluctant to acknowledge any connection to trade flows.

So I’m gratified that the International Monetary Fund has just lent additional support to this thesis, but I’m under no illusions that the determinedly oblivious conventional wisdom is going to budge – especially since the Fund goes out of its way absolve lopsided trade flows of any blame.

According to the Fund’s new External Sector Report (click here for a link to the PDF), these imbalances (measured in their broadest form, the current account) stayed at about the same share of the world economy last year as they did in 2016 (some 3.25 percent). Yet in the IMF’s view, between 40 and 50 percent of these imbalances were “excessive (that is, not explained by countries’ fundamentals and desirable polices).”

Why should anyone care? Because, as the Fund explains, “Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability.” Specifically, “Over the medium term, sustained deficits, leading to widening debtor positions in key economies, could constrain global growth and possibly result in sharp and disruptive currency and asset price adjustments.”

That last reference to “sharp and disruptive currency and asset price adjustments” is a fancy, and deliberately understated, way of saying “financial crisis.”

The danger is underscored by Figure 1 from the Report (on page five) – which shows how the world’s current account situation has changed over time. Optimists might take comfort from the fact that the overall global imbalance today (showed by the thick, solid line), is considerably smaller as a share of global output than it was at the peak of the last decade’s bubble. Also of interest: China’s current account surplus has shrunk in relative terms, while those of Japan, Germany, and the Netherlands have remained about the same. (For evidence that the better Chinese numbers are largely smoke and mirrors, see this analysis from the Council on Foreign Relations – not exactly a hotbed of protectionist thought.)

But here’s what the pessimists would note – and what should worry everyone: Although the total worldwide current account imbalances is down, so is global growth. During the peak bubble years, it was about 4.30 percent annually after inflation. During the current recovery, it’s been much lower, and last year, it was 3.15 percent. Worse, a new slowdown may well be in the cards.

That is, the world economy seems to be facing all the dangers of a new financial crisis without having received many of the (dubious) benefits of a preceding bubble.

The IMF has a solution: The persistent surplus countries should spend more (which will presumably pull in more imports from the deficit countries) and the deficit countries should take “actions to strengthen public and private sector balance sheets” (that is, in large measure, spend less).

And it sends a warning: “[P]rotectionist policies should be avoided as they are likely to have significant deleterious effects on domestic and global growth, while limited impact on external imbalances.”

These are pretty standard prescriptions. The trouble is, as usual, neither the surplus nor the deficit countries are showing any interest in following them. Moreover, the IMF’s views on the relationship between trade flows on the one hand, and national borrowing and spending and savings rates on the other, seems to repeat the canard that net savings levels determine trade flows. Nowhere do its economists acknowledge that the fundamental mathematical relationship is that of an identity – which says nothing about causation at all. As a result, they also ignore all the ways in which trade flows can determine savings rates.

It’s anything but realistic to expect the Fund to endorse President Trump’s tariffs or any of the rest of his trade policies. But it also seems to remain anything but realistic to expect the Fund to identify any plausible alternative ways to prevent today’s global imbalances from turning into Financial Crisis 2.0.