A stopped clock is right twice a day, and, at least by one measure, President Trump was right about the United States running a trade deficit with Canada. The episode serves as a good reminder of a) the challenges that global supply chains pose to measuring trade flows; b) the need to stop treating unilateral trade balances as scorecards; and c) a signpost toward smarter trade policies.
This dust-up starts with Trump complaining to Canadian Prime Minister Justin Trudeau about the U.S. trade deficit with Canada. By his own admission, Trump didn't know what he was talkingabout. He just felt like saying it. As Canadian trade representatives were quick to underscore, the U.S. data reveals a tradesurpluswith Canada.
What's surprising, however, is that the Canadian data reveals theopposite. The way they count the flows across our border, we are importing more from Canada than we are exporting to them (see Bloomberg figure below). By theiraccounts, Trump was right.
If you're confused, trust me, you're not alone. In this case, it comes down to the different ways we and the Canadians score re-exports, or goods that pass through Canada, as opposed to being produced there. In Canada's accounts, a Chinese washing machine that passes through a Vancouver port on its way to the United States gets counted as a Canadian export. In the U.S. data, that is a Chinese export. Thus, the Canadian data will show more exports flowing our way than will the U.S. data.
The group Public Citizenpoints outthat when they crunch the numbers (their bold):
"The United States exported $267 billion to Canada in 2016, of which $46 billion is labeled 're-exports.' This means that U.S. domestic exports to Canada were $221 billion. Do the same with the Canadian data: Canada's domestic exports to the United States were $266 billion.You will see that the United States had a $45 billion goods deficit with Canada when comparing the nations' domestic goods exports to each other."
That's just goods, but Public Citizen finds that even accounting for trade services, Trump was right.
Some take this to mean "checkmate Trudeau, you handsome devil! Cease and desist!" I do not. Instead, I take it to imply that trading partners need to harmonize their treatment of re-exports. The real criterion for an export should be that it constitutes significant, domestic economic activity in its production, not just repackaging or reshipping.
That is harder than it sounds as goods are increasingly produced in many different places. The Chevy Bolt, according theNew York Times, is "as American as a karaoke bar." It is "composed of 26 percent American/Canadian parts. The sales sheet isn't more specific because the parts don't care whether they're made in Ontario or Michigan."
Still, putting a car together, even with imported parts, creates real economic activity; shipping a car that was assembled somewhere else through your port creates far less.
Luckily, smart trade policy doesn't need to solve these metaphysical puzzles. Instead, we need to understand when trade flows (measured as consistently as possible) are problematic, whom they hurt, and what to do about them.
Right now, when we're closing in on full employment, trade deficits do not pose a broad economic problem, though they still represent the damage done to communities that have lost their manufacturing base and have been largely abandoned by policymakers, who play directly into Trump's hands by endlessly prattling on about the benefits of free trade, with no reference to globalization'sdownsides.
When trade deficits are a problem is when there are no countervailing forces to offset their negative impact, or when the borrowed capital that flows here to support the deficit is plowed into unproductive investments such as housing bubbles (the 2000s) or recklessfiscal deficits(now).
In this regard, it's important to recognize that we've been running economically significant trade deficits in this country since the mid-1970s, suggesting something structural (as opposed to the ups and downs of the business cycle) is in play. Part of that "something" is "mercantilist" policies by our trading partners, who intervene in global currency markets to cheapen their currencies and, thus, the dollar cost of their exports to us.
So, instead of making up stories about trade balances, even if they accidentally turn out to be true, here is what we ought to do. Instead of trying to block imports through scattershot tariffs, which have no track record of lowering trade deficits, we should help our manufacturers expand their exports by fighting back against currency manipulators and by helping smaller manufacturers link up with global supply chains.
The former calls for "countervailing currencyinterventions"— you intervene in our currency markets, we'll intervene in yours. The latter calls for at least doubling the paltry $130 million budget of the Manufacturing Extension Partnership, the best littleagencyyou've never heard off, with a long history of helping small and medium-size manufacturers increase their efficiency, sales and jobs.
Next, as Dean Bakerargues, stop protecting professionals and patents, as doing so promotes upward redistribution and, thus, exacerbates the already inequality-inducing aspects of trade.
Add to that a true opportunity agenda for those hurt by globalization, featuring ajobsprogramin places where, even today, employment remains weak, and we will begin something that has long eluded us: a useful, substantive conversation about trade.