Trade Deficit Confusion Is Bipartisan

President Trump and his trade advisers are the most vocal in putting forward misguided views on the trade deficit, but, unfortunately, their position is a bipartisan one. Here's something Congressman Brad Sherman of California said recently:

But Rep. Brad Sherman (D-CA), ranking member of the House Foreign Affairs Asia and the Pacific subcommittee, told Inside U.S. Trade he would be “surprised if any [bilateral] deal is finalized in the next 12 months.” Sherman met with Gerrish late last week, he said.

“Look, we spent 50 years telling the world that the only moral and correct thing to do was to have the United States run an enormous trade deficit with the entire world,” he said. “Of course, they decided to agree. Getting them to change their minds is not something that we are doing all that effectively and it’s certainly not something that is easy.”

Asked if he was confident a bilateral deal would be initiated in the near future, Sherman said “no, definitely not.”

Gerrish, he said, “was getting my input, but my input is certainly if you are dealing with a managed economy there has to be stated goals for how large the trade deficit will be or whether it will be balanced trade,” he said. “And it’s good to have people focused on the trade deficit; whether they are going about it the right way is perhaps another story. But ignoring it is a short-term strategy.”

Asked which countries might be top contenders for a bilateral, Sherman said none, adding that the criteria USTR was using to determine candidates was based on countries that trade fairly.

The U.S. will “strike deals” only with countries “that will provide for balanced and fair trade, of which there are none that I’m aware of right now,” he said.

The notion that a trade deal should lead to "balanced trade" seems like it comes from a Cuba-Venezuela trade arrangement, in which oil is traded for doctors. In the free market world of trade agreements, by contrast, the parties agree not to a barter of goods and services, but rather to remove tariffs and other protectionist barriers. The resulting bilateral trade balance is something to be determined by the market. The new trade flows are probably worth studying for various academic reasons, but are not a measure of success or failure of the deal.

By contrast, Congressman Sherman seems to think that the negotiation is over the trade deficit itself: "there has to be stated goals for how large the trade deficit will be." But that's not how U.S. trade negotiations do work or should work. What we negotiate about is the level of tariffs and other barriers. (Ideally, both sides would agree to have no tariffs, although in practice it is often just a lowering of tariffs.)

There can be complications from trading with the "managed economies" that he refers to, but those can be dealt with in trade agreements through specific rules. For example, they can establish rules on how state-owned enterprises should behave. There were rules of this sort in the Trans Pacific Partnership, and it would be a good idea for someone to propose similar rules in an agreement with China. 

International rules to limit managed trade and constrain protectionism are a good idea. A (bipartisan) focus on bilateral trade deficits, by contrast, won't address these fundamental issues, and is a big mistake.

Congressman Sherman's comments did not surprise me, because I had a brief exchange with him on this very issue in a House Committee hearing last year on the impact of a US-UK trade agreement (starts at 1:12:28). He asked the following question and was looking for a short answer: "Would a deal with Britain that simply eliminated all tariffs be good or bad for reducing America's trade deficit? ... it's possible that it can't be estimated." I knew I wouldn't be able to have a real discussion with him in this setting on the value of trade deficits as a metric, but in answering I wanted to get the point out there that looking at trade deficits is a mistake, so I said: "I can't estimate it but I also don't think trade deficits are bad for the economy." He responded by saying, "We lose 10,000 jobs for every billion dollars of trade deficits ...", but then quickly moved on.

We have spent a lot of time over the years rebutting the misunderstandings about trade deficits: See, e.g., here, here, here, and here. But clearly, there is still work to do.