By Ernesto Grijalva
In war, identifying the wrong objective can be perilous. In a trade war, the trade deficit may be the wrong enemy, and reducing it, at any cost, would be the wrong objective.
Consider the following:
- In 1993, San Diego’s unemployment rate stood at 8.4 percent. By 1999, after six years of the North American Free Trade Agreement, the unemployment rate had fallen to 2.6 percent.
Walmart, America’s largest importer overall since 2012 (an estimated $50-plus billion per year in just Chinese imports), is also America’s largest private employer (1.3 million employees).- The last U.S. trade surplus occurred in 1975, during a recession.
- From 1992-2000 the trade deficit experienced the largest expansion in history, from $85 billion to a then record of $436 billion. During that period the U.S. economy grew by an average of over 3.8 percent per year, one of the longest periods of sustained growth in U.S. economic history.
- During the last nine years, the trade deficit has grown from $504 billion to $796 billion. Concurrently, the U.S. has also achieved the lowest unemployment rate in 50 years.
Confused? You should be. Correlating the U.S. trade deficit as directly proportional to loss of U.S. jobs may sound logical, but it’s not factually accurate. Historically, periods of U.S. economic prosperity have run parallel with larger trade deficits.
There is a simple explanation. Unlike the federal budget deficit, the trade deficit measures purchases, not debt. When people have more money, they buy more. In a world where manufacturing is most often a multinational endeavor, that means much of what they buy will be assembled abroad. Additionally, trade statistics tend to be distorted because they measure the value of the finished product as being entirely from the country from which that product was last exported. Cars, mobile phones, computers, kitchen appliances and televisions are almost never made entirely of material and labor from just one country.
It is American consumerism that most closely correlates with an increase in the U.S. trade deficit, not a lack of patriotism or machinations by foreign governments. To punctuate that point, consider that despite the focus on reducing it, America’s trade deficit with China has so far been higher each month of 2018 than in the same month in 2017, correlating with a period in which the economy has also gotten stronger. According to the National Retail Federation, overall retail imports have risen by 3.8 percent in the first half of the year over the same period last year. In essence, a stronger economy with higher U.S. employment means more purchases and a higher U.S. trade deficit.
Yes, it may be easy to win a trade war if your singular goal is to reduce the U.S. trade deficit. However, there will be casualties.
In a trade war tariffs are increased to make imported goods less attractive to domestic consumers. In a vacuum, the formula looks simple: less foreign products are purchased and the trade deficit goes down. However, in a trade war, there are retaliatory tariffs on U.S. goods. The cost of U.S. goods and services abroad also goes up, making them equally unattractive to foreign consumers. As an end result, things cost more everywhere, resulting in fewer purchases everywhere, including fewer purchases of U.S. made goods both here and abroad. Gradually there are fewer workers needed everywhere — including in San Diego.
Lest we forget, war is hell.
Ernesto Grijalva is senior vice president for legal affairs in Latin America and the Caribbean for Pricesmart and a member of the San Diego & Imperial District Export Council.