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Trade Deficit Rising!

Summary:
Since 2017Q1. By Mr. Trump’s own metric, we’re losing. But it’s a stoopid metric for evaluating “unfair”-ness. From the last GDP release (which incorporates March trade release):Figure 1: Net exports to GDP (blue), and net exports excluding petroleum products (red), as a ratio to GDP, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. Here’s a detail, in nominal dollar terms: Figure 2: Net exports to GDP (blue), and net exports excluding petroleum products (red), both nominal, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. As noted in numerous instances (EconoFact, Steil/BI), trade deficits

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Since 2017Q1. By Mr. Trump’s own metric, we’re losing. But it’s a stoopid metric for evaluating “unfair”-ness.

From the last GDP release (which incorporates March trade release):
Trade Deficit Rising!
Figure 1: Net exports to GDP (blue), and net exports excluding petroleum products (red), as a ratio to GDP, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations.

Here’s a detail, in nominal dollar terms:

Trade Deficit Rising!
Figure 2: Net exports to GDP (blue), and net exports excluding petroleum products (red), both nominal, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations.

As noted in numerous instances (EconoFact, Steil/BI), trade deficits usually widen during periods of accelerated growth, for two reasons. First, greater economic activity results in higher consumption and investment, some of which involve imported goods and services. Second, faster growth relative to the rest of the world is usually associated with a currency appreciation which reduces price competitiveness.

Here I provide an additional way of looking at the relationship between growth and trade deficits — namely scatterplots for the periods from recession trough to peak.
Trade Deficit Rising!

Figure 3: Annualized q/q real GDP growth, % against nominal trade deficit as share of nominal GDP, % for recession trough-to-peak samples. Source: GDP 2016Q3 3rd release, NBER, and author’s calculations.

Notice the clear correlation — as growth accelerates, trade deficits widen.

These are (at least) two reasons why focusing on overall trade balances at business cycle frequencies is misguided (and focusing on bilateral balances even more misguided). Over longer spans, the current account — which for the US is mostly accounted for by the trade balance — is determined by private saving, public saving and investment trends, which are barely affected by sectoral tariff and nontariff barriers.

More on determinants of exports and imports at the aggregate level, here, and some discussion of how the collision of expansionary fiscal and tightening monetary policy is going to work against the goal of shrinking the trade deficit.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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