Will the Mexican trade deficit be higher than the trade deficit with China soon?

Alfonso Llanes, Master Degree in International Development

Answered just now

Throughout his campaign, Donald Trump has insisted that most of what is wrong with the U.S. economy comes down to big trade deficits. However, this view is not only naïve and simplistic but lacks economic understanding as the underlying causes for the ills of the U.S. economy are far more complex than just trade deficits.

Trump argues that if United States sold more to the rest of the world than it bought from overseas the U.S. economy would take a dramatic turn for the better, especially, in manufacturing where the shift to foreign factories has cost millions of American jobs.

Focusing on the trade deficit as a tally of economic health is not only misguided, but it also diverts attention from fundamental issues that will have far bigger effects on the log run of American’s economic health.

There is no doubt that U.S. trade in goods is askew but while Trump’s obsession with trade deficits is a good political message for his base, he overstates the economic importance of trade deficits. His logic is faulty if used uniquely to measure deficits or surpluses of commercial relations with any country and ignores the complexities of trade in today’s global economy.

The trade gap with Mexico, looks very big — $63 billion last year. But the reality is that about 40% of the value of the goods imported from Mexico is made in the U.S.

Contrary to Trump’s thinking experts say trade deficits:

• Reflect a low savings rate relative to consumption and investment.
• Jobs loses due to automation
• The informal, veering to right and left approach to trade policy

The link between trade deficits and jobs is not so clear;

• Change in the balance of trade and manufacturing jobs have often moved in opposite directions.
• During economic downturns, U.S. trade balances tend to improve during steep drops in imports as factories cut back on employment.
• Trade deficits don’t give the U.S. leverage to force trading partners into conceding better trade deals.
• Trump’s tax cuts lack spending offsets to pay for the cuts and it will increase the national debt.
• That higher borrowing by the U.S. government will push up interest rates.
• Higher rates will attract global investments in U.S. Treasury bonds.
• Increased demand for U.S. bonds will tend to strengthen the U.S. dollar.
• With a strong dollar American exports will become more expensive and imports will be cheaper.
• Weaker demand for U.S. exports and cheaper prices for imported goods will worsen the trade deficit and throw the U.S. economy in a loop.

Today, many American workers compete head-to-head with foreign workers for jobs that require modest skills and education. U.S. workers cannot win this contest, because workers in most other countries are paid less and what they produce can be sold for less. The answer given by many economists is to train Americans for jobs that require more technical skills than the low-wage foreign workers possess.

Investing in more education and training will pay especially big dividends because the increasingly high-tech economy of the future will make lower-skilled workers less and less valuable. Nevertheless, such investment does not seem to be a priority for Trump.

Another long-term problem is that Americans save at much lower rates than the countries that have risen to become major economic challengers, especially China.

Trump’s tax plan would only make matters worse, analysts say, because his proposal for tax cuts would increase U.S. government debts by trillions of dollars, which would tend to push up the trade deficit.

In one sense, the most important U.S. export is the dollar. Because the dollar is considered the safest currency in the world, foreign nations and wealthy firms and individuals buy and hold huge reserves of this currency, even though, it earns very little interest.

Trump may, in fact, end up disrupting financial markets and discouraging savings with deregulation of the banking and capital financial institutions. Many observers have said that Trump administration officials, “are not exactly informed by economic literacy.”