Trump administration’s focus on trade deficit ‘a distraction,’ says ex-Bush 43 economist

Ups and downs of trade deficits: Expert
Ups and downs of trade deficits: Expert

Parts of the incoming administration have become too focused on the trade deficit, as it hangs in delicate balance with foreign investments flowing into the United States, former Bush 43 economist Gregory Mankiw told CNBC on Tuesday.

"We're importing more than we're exporting, but the money that the foreigners are getting for those imports is coming back to the U.S. economy in the form of capital flows," Mankiw told "Squawk Box." "A trade deficit's going to naturally result from that."

While Mankiw had no objection to Donald Trump's call to ramp up exports, the Harvard professor said that if foreign investors want to continue bringing money to the United States, they have to make money, which becomes increasingly difficult if the president-elect decides to raise tariffs.

"This focus on the trade deficit is, I think, a distraction," said Mankiw, who was chairman of the Council of Economic Advisers under President George W. Bush.

Mankiw added that Trump's push for pro-growth policies may run counter to the negative view of the trade deficit, which Trump's pick for Commerce secretary, investor Wilbur Ross, said was a drag on economic growth.

"If Donald Trump gets a better tax policy, if he gets a better regulatory policy, that's going to make our economy grow more," Mankiw said. "That's going to attract more capital to the United States, it's going to make the dollar stronger, and lead to larger trade deficits."

"Some of the things he's talking about are good policies, but they're not necessarily going to move the trade balance towards zero," he added.