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Trump's preferred way to judge trade deals is not a good measure of their success

  • President Donald Trump keeps bringing up trade deficits as evidence that free trade agreements are failing the U.S.
  • But analysts said trade deficits, especially with a focus on manufactured goods, don't offer much as a measure of a pact's benefits
  • They also noted that efforts aimed at eliminating U.S. trade deficits would be both costly and likely to fail

The Trump administration has made trade deficits the yardstick for measuring the success of trade deals, but that's a miscalculation, analysts said.

President Donald Trump has applied labels such as a "disaster" and "horrible" to various U.S. trade deals, including the North American Free Trade Agreement, or NAFTA, and the South Korea-U.S. free trade agreement, known as Korus.

Trump says what proves those deals are so horrible is that the U.S. has trade deficits, meaning it imports more from some trade partners than it exports to those nations.

"The United States has trade deficits with many, many countries, and we cannot allow that to continue," Trump said in June in a meeting with South Korean President Moon Jae-in.

But analysts have said trade deficits, especially with a focus on manufactured goods, don't offer much as an indication of a pact's benefits. As it currently stands, the measurement of trade disparities is often separated into goods and services categories, with the U.S. administration prioritizing goods.

Yet despite the White House focus on deficits as evidence of deals' failures, some large trade imbalances can't even be tied to any pacts.

"Take China, for example, which is the country with which we have the largest trade deficit — over $300 billion. We don't even have a trade agreement with China," said Miriam Sapiro, the deputy U.S. trade representative during the Obama administration who also served in the Reagan, Bush and Clinton administrations.

Sapiro also noted the U.S. had a trade surplus last year with Canada, which is a party to NAFTA along with Mexico.

"We didn't see Canada rushing to try to renegotiate NAFTA because it was worried," Sapiro, who currently heads the D.C. office of public relations firm Finsbury, told CNBC's "Squawk Box" on Thursday.

Others said the goal of eliminating trade deficits was unlikely to succeed.

"The odds of perfectly balanced trade between any two countries are near zero," said Deborah Elms, executive director of the Asian Trade Centre. "I would argue that it's impossible to have perfectly balanced trade, especially when measured in trade in manufactured goods," she said.

Elms noted that the Trump administration has focused its attention largely on manufactured goods, without much consideration given to the service sector, where the U.S. often runs surpluses.

Additionally, she said trade agreements don't tackle larger reasons for the U.S. trade deficits, particularly the low savings rate.

"When it spends, it's sucking in imports," she said. "So the U.S. automatically runs a trade deficit."

A ship is unloaded in Miami, Florida.
Carlo Allegri | Reuters
A ship is unloaded in Miami, Florida.

Others acknowledged that the trade deficit could potentially weigh on U.S. job creation, but that wasn't a reason to try to achieve more balanced trade.

"All else equal, a more favorable trade balance will raise demand and boost employment. But all else is not equal," J.W. Mason, an assistant professor of economics at John Jay College-CUNY and a Roosevelt Institute fellow, said in a note last year.

He said that because the world essentially operates on a dollar standard, similar to the previous gold standard, the U.S. can finance its trade deficits indefinitely, while other countries can't.

"[P]olicies intended to improve the U.S. trade balance are likely to lead to lower growth elsewhere, imposing large costs on the rest of the world with little or no benefits here," he wrote.

Mason advised that instead of "costly" efforts to reach a trade surplus, the U.S. would be better off with measures to increase productive investment in both the public and private sectors.

Others have noted that assigning the blame for trade deficits to trade deals may result from a failure to understand those pacts.

For example, at the same June meeting between Trump and Moon, U.S. Commerce Secretary Wilbur Ross complained that the U.S. goods trade deficit with South Korea doubled since Korus took effect, which he blamed primarily on autos.

But measures in Korus related to autos haven't yet been phased in. And some economists have blamed the rise in the goods trade deficit on South Korea entering a recession as the deal was completed in 2011, a circumstance that undoubtedly dampened demand for imports.

The U.S., it's worth noting, has a surplus in services exports to South Korea.

Some analysts have noted that any American efforts to lower the trade deficit by exiting trade deals could backfire.

Caroline Freund, a senior fellow at the Peterson Institute for International Economics and a former World Bank economist, noted recently that if the U.S. goes through with threats to pull out of NAFTA, it would likely result in a larger, not a smaller, deficit.

That's because it would send Mexico's peso plunging, which would make U.S. goods more expensive south of the border and Mexican goods much more competitive in its Northern neighbor, she said in a PIIE post in August.