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Growth, not Tariffs, Will Fix our Trade Deficits

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Growth, not Tariffs, Will Fix our Trade Deficits

July 10, 2018

President Trump yesterday pledged 10 percent tariffs on another $200 billion of Chinese imports. But economic growth is already eating away at the very trade deficit he’s seeking to ax with these tariffs.

Trade data for May, when adjusted for seasonal variation, show that the trade deficit was down $3 billion from April—from $46.1 billion to $43.1 billion.

While services and goods imports stayed roughly similar, the decline was mostly driven by rising goods exports—nearly $4 billion more than in April, with soybeans, energy and airplanes fueling most of that surge. Soybean exports rose nearly $2 billion in value—arguably a Chinese rush for a product that may soon be subject to retaliatory tariffs.

On the services side, the United States appears to be slowly but surely consolidating surpluses with a focus on established exporting sectors, with a combined rise of nearly $400 million across finance, insurance, charges for the use of IP, transport, telecoms and other major categories of professional services.

Another reason the positive numbers may be downplayed is the worsening of our largest bilateral deficits in goods: $5,225 billion larger with China, and $1,757 billion larger with NAFTA. However, though not enough to compensate, our balances in goods with other strategic partners are noticeably improving. Namely, data show a rebalancing of $1,550 billion with Europe, $793 million with Japan and $422 million with Africa.

But the largest boost of all was to our balance with OPEC—$2,542 billion. Besides the continuing freefall of oil imports from Saudi Arabia and Venezuela, the United States has to date exported almost $11 billion worth of natural gas, almost $2 billion more than through the same period last year after the shale boom was well under way.

Crucially, US consumption of foreign oil has continued rebalancing away from OPEC. While imports of crude from the cartel have dropped by nearly 22 million barrels since April, other producers such as Canada, Colombia, Argentina and Mexico are growing their share of the US market – 8 million, 4.6 million, 1.5 million and 766,000 more barrels than in April, respectively.

Shifting our consumption of foreign oil away from OPEC is good on two major counts: more secure supply lines and less price volatility. Though the United States imported on average 373,000 fewer barrels of crude daily in May, the value of those imports rose by nearly $700 million due to higher unit prices. But as global demand keeps shifting towards cheaper American gas, the US’ energy renaissance will inevitably bear out powerfully in our trade numbers.

As cars edge towards the spotlight of trade debates, opponents of auto tariffs on the EU will likely point to modest growth in exports of passenger cars, trucks and parts. Even Germany picked up $149 million more worth of US car sales out of a $608 million increase. The evidence on whether Europeans are responding to the expectation of looming tariff hikes on US cars is less clear.

The worst news has come from the tech space: with imports growing more rapidly than exports, our trade balance in advanced tech products is worse off by $803 million relative to April. Except for aerospace technology and advanced weaponry where exports have grown, the decline in tech trade balances seems rather broad-based.

However, given that supply chains are often most globalized in the cutting-edge sectors of the new economy, the WTO’s rules of origin means a declining trade balance need not necessarily reflect a lesser competitive advantage. Growing domestic demand for US products may often result in higher import numbers when the better part of the gadget’s value added is shipped from China. iPhones are the textbook example.

A booming energy sector, modest increases in goods exports, and a gush of money repatriated home after last year’s tax bill have started to eat away at our trade deficits. A growing economy may be the protectionists’ best bet to rebalance trade.

Jorge González-Gallarza is a policy associate at E21. Follow him on Twitter here

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