Gathering Clouds on Trade Can Be Swept Away by Getting Policies Right

By at 6 December, 2017, 9:08 am

by Raymond J. Keating-

Free international trade remains central to the immediate and long-run growth and well-being of the U.S. economy, including for entrepreneurs, small businesses, workers and consumers. Quite simply, reducing governmental barriers to trade and keeping such barriers low are central to expanding opportunities, reducing costs, and increasing choices.

The U.S. trade picture, however, is cloudy in terms of both the numbers and the policies.

The latest trade numbers for October released by the U.S. Bureau of Economic Analysis were mixed. On the export side, after five months of welcome, though uneven, growth, exports effectively were flat in October. Of course, the hope is that this stall is temporary. It’s vital that export growth reaccelerate after exports declined in 2015 and 2016. Thankfully, through the first ten months of 2017, exports actually are by 5.3 percent compared to the same period last year.

As for imports, they experienced some solid growth in October, which was the second straight month of expansion. During 2017, though, imports have been up and down depending on the month. Still, through the first ten months, imports grew by 6.5 percent versus the same time last year. Remember, growing imports are not some kind of economic negative. Instead, import growth reflects an expanding domestic economy, as both consumers and businesses purchase more goods and services.

And yes, when imports grow faster than exports, the trade deficit increases. Unfortunately, the trade deficit has gained unwarranted attention in the political debate over trade. It must be understood that, as history shows, when the U.S. economy experiences strong growth, generally either trade deficits expand or trade surpluses shrink.

In fact, a surefire way of shrinking the U.S. trade deficit would be a U.S. recession, as occurred during the 2007 to 2009 recession. Why? Two reasons.

First, a current account trade deficit (i.e., a deficit in terms of goods and services) coincides with a capital account surplus (i.e., a surplus in terms of investment moving into and out of the U.S.). That’s a good thing in that foreigners are investing in the U.S.

Second, a growing U.S. economy means consumption increases and businesses are increasing purchases of, for example, capital goods, leading to increasing imports. And given the size of the U.S. economy and the relative wealth of Americans, an overall trade deficit and deficits with certain individual nations are not unexpected, and again, do not reflect some kind of unfairness at work.

Therefore, it’s worth noting that as (or if) pro-growth tax and regulatory policies become reality going forward, then it’s likely that the U.S. trade deficit will increase.

For all of these reasons and more, it’s important that the Trump administration come to realize the realities of trade, and the consequences of moving in a protectionist direction.

Which Brings Us to NAFTA

For example, talks on renegotiating NAFTA seem to be stuck in a dangerous place, with the U.S. pushing for measures that would raise costs, create uncertainty and reduce opportunities for U.S. entrepreneurs and businesses. As noted in a sobering Financial Times report, the U.S., for example, is pushing a sunset clause, which “would cause the deal to expire every five years without new negotiations,” while also seeking “higher regional content rules, a requirement for cars to be 50 per cent US in origin, reciprocal government procurement rules and the scrapping of some dispute resolution mechanisms” – along with the underlying assumption by President Trump that “trade deficits are proof that the US is being taken for a ride and it is time for others to play ‘fair’.”

This is all deeply troubling. The U.S. move away from free trade, as exhibited by its withdrawal from the Trans-Pacific Partnership and its push to undermine NAFTA will have grave consequences for U.S. small business, workers and consumers. That was explained in a recent SBE Council analysis titled Global Trade Agreements Expanding (Without the U.S.), Leaving Our Small Businesses Behind.

Why Undermine Growth, Investment and Competitiveness?

If the U.S. continues down this misguided path on trade, thereby raising costs, it ironically and tragically would work against efforts via tax reform to make the U.S. more competitive internationally in terms of attracting investment. Recall that in the case of nearly every trade accord the U.S. has entered into over the last three-plus decades, our trading partners previously had much higher barriers to trade (such as tariffs), and it was U.S. entrepreneurs, businesses and workers involved in or seeking to export that benefited most. Stepping back from free trade means that businesses in the international arena have greater incentives to set up shop in nations that are moving ahead with free trade agreements.

Of course, small businesses and their employees are left suffering the most – facing higher trade barriers – as they don’t have the ability to move to another country. And this very much is a small business issue, as, according to U.S. Census Bureau data, 86.7 percent of U.S. exporting firms have fewer than 50 workers and 91.9 percent less than 100 employees; while on the import side, 85.5 percent have less than 50 workers, and 90.8 percent less than 100 employees. And regarding our NAFTA partners, 75.4 percent of firms exporting to Canada and 72.7 percent of firms exporting to Mexico have less than 50 employees.

When it comes to trade policies, dark clouds are starting to gather. But this can be easily fixed. As was the case largely since World War II, the U.S. needs to get back to leading the globe in the direction of reducing governmental barriers, obstacles and costs to international trade so that U.S. entrepreneurs, small businesses, workers and consumers can take advantage of expanding global opportunities.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

News and Media Releases