PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Latest Trade Data and the Trade Deficit

By at 6 March, 2019, 3:38 pm

by Raymond J. Keating-

If you mistakenly believe that trade deficits are bad for the U.S. economy, then you can’t be pleased with the trade deficits reported by the U.S. Bureau of Economic Analysis for December 2018, and for all of 2018.

In reality, though, trade deficits do not signal economic troubles. Instead, trade deficits tend to expand when the U.S. economy is growing – as U.S. consumers and businesses purchase more imports, and the U.S. attracts more international investment.

Remember, when the U.S. current account (mainly, trade in goods and services) is in deficit, then the capital account (which sums up changes in ownership in real and financial assets, including direct investments and loans) is in surplus. And when the U.S. runs a capital account surplus, then capital inflows to the U.S. exceed capital outflows. The U.S. runs a capital account surplus because it’s an attractive place to invest, and such investment helps to fuel economic, productivity, income and job growth.

It’s not surprising that the imports grew in 2018, given that the U.S. economy experienced faster economic growth in 2018 (2.9% real GDP growth) than it saw in 2016 (1.6%) and 2017 (2.2%).

For all of 2018, U.S. imports grew by 7.5 percent in nominal terms, and were up in December 2018 versus the previous month. However, it also must be noted that December imports were down compared to the levels registered in October and September.

On the export side, there was growth for all of 2018 – up by 6.3 percent in nominal terms. But monthly exports declined during the last three months of 2018, and the December level was effectively the same as what was registered in February 2018. (See the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

The biggest concern regarding the latest trade report is not the trade deficit, but the decline in trade – both exports and imports – experienced during the final months of 2018.

That, at least in part, is due to trade policies that have raised costs and uncertainties for U.S. individuals and businesses looking to trade with other individuals and businesses elsewhere in the world. Going all the way back to Adam Smith and his Wealth of Nations in 1776, it is indisputably understood that the best trade policies focus on lowering or eliminating governmental barriers to trade.

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

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