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US Imposes Tariffs, and the 2018 Trade Deficit Rises: Lessons?

Summary:
Early in 2018, President Trump began instituting a series of tariffs on international trade. As he tweeted in March 2018: "When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down 0 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!"Last week, the US Department of Commerce announced the US trade figures for year-end 2018. After a year of President Trump's tariffs, the US trade deficit is larger in 2018 than it was in 2017. The bilateral US trade deficit with China is up, too. The government report notes: For 2018, the goods and services deficit was 1.0 billion, up .8 billion from 2.3 billion in 2017. Exports were

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Early in 2018, President Trump began instituting a series of tariffs on international trade. As he tweeted in March 2018: "When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!"

Last week, the US Department of Commerce announced the US trade figures for year-end 2018. After a year of President Trump's tariffs, the US trade deficit is larger in 2018 than it was in 2017. The bilateral US trade deficit with China is up, too. The government report notes:

For 2018, the goods and services deficit was $621.0 billion, up $68.8 billion from $552.3 billion in 2017. Exports were $2,500.0 billion in 2018, up $148.9 billion from 2017. Imports were $3,121.0 billion, up $217.7 billion from 2017. The 2018 increase in the goods and services deficit reflected an increase in the goods deficit of $83.8 billion, or 10.4 percent, to $891.3 billion and an increase in the services surplus of $15.0 billion, or 5.9 percent, to $270.2 billion. As a percentage of U.S. gross domestic product, the goods and services deficit was 3.0 percent in 2018, up from 2.8 percent in 2017. ... The deficit with China increased $43.6 billion to $419.2 billion in 2018. Exports decreased $9.6 billion to $120.3 billion and imports increased $34.0 billion to $539.5 billion.
Thus, a fairly common situation arises. A politicians claims that a certain Problem has a certain Solution. But when the politician is elected and the Solution is tried, the Problem is either the same or worse. It is rare for any politician in this situation to reconsider their Solution. Instead, the usual approaches are to argue that an even bigger and longer dose of the Solution is needed, or that the Solution was somehow sabotaged by poor implementation and political opposition.  

It will be interesting to see if President Trump acknowledges at some point that using tariffs to reduce the US trade deficit failed in 2018. My expectation is that any such acknowledgement would be followed by a claim that his tariff Solution was somehow undercut and thus only needs to be redoubled in the future. 

But for those with eyes to see, it should be apparent that trade deficits and surpluses rise and fall as a a result of large-scale macroeconomic factors, not because of fluctuation in "unfairness" that can be fine-tuned and adjusted with tariffs. I've tried to explain this point in more detail a few times: for example, see "Misconceptions about Trade Deficits" (March 30, 2018), "Some Facts about Current Global Account Balances" (August 7, 2018), and "US Not the Source of China's Growth; China Not the Source of America's Problems" (December 4, 2018). Here, I'll just focus on events of 2018. 

The US economy had solid economic growth in 2018, driven in part by the short-term effects of the tax cuts signed into law in December 2017. When an economy grows briskly,  consumption tends to rise, including its consumption of imported products. This pattern is standard. For example, the US trade deficit fell sharply during the Great Recession, because consumption of all kinds--including imports--fell as well. Meanwhile, China has been experiencing a slowdown in its rate of growth, so there has been less of a rise in consumption and imported products than would have been expected.

The health of the US economy has led the Federal Reserve to raise interest rates several times in the last few years. As a result, global investment funds have flowed back to the US economy, and the additional demand for US dollars in foreign exchange markets has pushed up the foreign exchange value of the US dollar. This makes US exports more expensive overseas, and also makes it cheaper for US consumers to buy imported products. 

It's also a completely standard dynamic that if the US imposes tariffs, other countries will respond with tariffs on US products. In my home state of Minnesota, for example, Trump's tariffs have tended to raise prices and help iron ore producers in the northern part of the state, but China's countertariffs on soybeans have hurt farmers in the central and southern part of the state. 

The idea that exports and imports are the outcome of of macro variables like levels and shifts between consumption and savings across different econmies, which are also affected by exchange rates, is completely standard intro-level economics. News stories on the Department of Commerce announcement made these points. 

The US and other  high-income countries have legitimate concerns about how China's government and firms treat intellectual property. That's a real Problem, and it's worth working to actual  Solutions--like having high-income countries form a united front against these Chinese practices through organizations like the the World Trade Organization and the World Intellectual Property Organization. If internationally-coordinated tariffs targeted on the main Chinese offenders emerged from that process, I suspect that even a lot of economists with free-trade leanings would see a case for such a step. But broad overall trade deficits are not the Problem to be chasing, and even if it was the right Problem,  the year 218 has shown that Trump's tariffs are not the Solution.

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