VMI economist: Don’t fret about higher US trade deficit 

By Abigail Summerville  

The U.S. trade deficit in goods reached a record $891.3 billion in 2018, according to Commerce Department data released March 6. U.S. stock markets didn’t react much to the news, but the deficit surge did raise concerns about President Donald Trump’s trade and tariff strategies. Col. Atin Basu Choudhary, an economics professor at Virginia Military Institute, explained why this isn’t necessarily bad news.    

What are some of the reasons the U.S. trade deficit has increased recently? 

It’s hard to assign causality; lots of things are happening at the same time. But what’s evident is that we have a trade deficit, but on the other hand we have a surplus because foreigners are sending their money to our shores to invest in our industries.  

Can you explain how President Trump’s tax cuts and tariffs may have affected the trade deficit? 

Tariffs in principle should reduce imports. But there are two things happening with the price of imports, and one is the exchange rate. The dollar is becoming stronger, which makes our exports more expensive but imports cheaper, so that’s driving a large part of the deficit and that’s countering the effect of the tariffs because otherwise we would have seen the tariffs really biting hard. As for the tax cuts, if they’re helping our companies abroad bring profits in, that means companies are buying more dollars, and so that’s raising the value of the dollar and that feeds into that effect. At the same time, the tax cuts have made the economy grow a little bit faster, and that means people are generating more of everything, so that’s increasing imports as well. 

What implications does this trade deficit have for Virginia? What sectors will be hit the hardest? 

Certainly, the export sector is going to be hit the hardest. [Virginia] exports a lot of our agricultural produce—that’s going to hurt. And a lot of manufacturing products—that’s going to hurt. One of the advantages, or disadvantages sometimes, of the Virginia economy is that a large segment depends on the size of the government. So, in Norfolk, that’s all military installations, and in Northern Virginia there’s more government installations. So as long as there’s federal spending, those sectors are going to be stable. And that’s why when we had the government shutdown, that really affected the Virginia economy. I think we have a bit of a buffer there, but that buffer itself could be a good or a bad thing depending on what the government is actually doing.  

What countries do you think are penalizing us?  

One of the advantages we have is that we’re a large player in the global economy. And this is another reason why the tariffs might not have had as much of an effect as one might think they would because a lot of exporting countries really want to have access to our markets, so they might be reducing their origin prices in response to our tariffs. For example, let’s say the price of a widget is $10 and we have a $10 tariff on it. The U.S. customer, you’d imagine, would pay $20, but really what’s happening is that … other countries are reducing their price to $1.50, so now it’s $11.50 instead of $20, so we don’t really cut back our purchases of that good. I was reading an article recently about the kind of deal we’re trying to make with China and how it could have an effect on Australia because if China allows more access to our beef, then Australian beef is going to become relatively less likely to get into China. So, in that sense, it might hurt our allies. One-to-one trade deals are really problematic as a consequence because some countries gain, and some countries lose and it’s better to have multilateral trade deals. 

Is a trade deficit necessarily a bad thing? 

It depends on how it’s financed. For example, if you look at Cuba back in the ‘80s, it was running a trade deficit with the Soviet Union because the Soviet Union gave them money to buy stuff, so there was a deficit on one side and the surplus was coming in because the Soviet Union was effectively lending Cuba money to buy Soviet stuff. The problem with that, of course, is that those are government-to-government things and all kinds of bad things happen as a consequence—it crowds out private investment, and Cuba is not well known for its private sector. And then if there are problems with the government-to-government transactions, the government stops lending, and suddenly Cuba is left high and dry. It can’t finance its deficits anymore, and so the whole economy shrinks and collapses. Or the deficit could be financed by foreigners lending money to us. Why would foreigners want to lend money to us? Because they want to get a return on it, and they think the return they’re going to get on the investment in the U.S. is higher than the return they’re going to get on their investment lending their money somewhere else. They believe the U.S. is going to grow faster than other countries, or have a safer growth rate. In that kind of scenario, foreigners are loaning money to us not just to buy stuff, but to build factories, to keep mortgage rates low. So that’s a net benefit to our country because now we have increased investment. A trade deficit by itself is irrelevant. It’s the wrong metric to use for any kind of policy decision.  

Is there anything else you’d like to add about the trade deficit? 

One lesson here that I really want people to understand is that the trade deficit itself is meaningless. It really depends on how it’s financed and it could be a good thing or it could be a bad thing. And right now, in the United States, it’s foreigners investing a lot of money in us, and that’s by and large a good thing.