Trump’s Trade Policy Failed, But U.S. Economic Policy Didn’t

(Bloomberg Opinion) -- The exploding U.S. trade deficit highlights the extent to which President Donald Trump's avowed trade policy is a failure. Yet it also stands as proof that, the president notwithstanding, U.S. economic policy is a success.

First, about that failure: It's a mistake to see these deficit figures by themselves as a rebuke of Trump's trade policy, which has focused on reducing the bilateral trade deficit with China. The strategy seemed to be bearing some fruit until that progress (if that is the correct term) was wiped out by the pandemic.

As my Bloomberg Opinion colleague Noah Smith points out, that's a little odd by historical standards. Typically, recessions and global crises reduce trade and bring down trade deficits. What happened this time? There is a two-part answer.

First, the pandemic struck America's major European trading partners before it came to the U.S. That meant the demand for U.S. exports collapsed even as U.S. consumers were happily buying foreign goods. When the virus did strike the U.S., imports fell sharply then leveled off after Congress passed the CARES Act in March, while exports continued to fall.

The effect of the CARES Act was so sweeping that U.S. personal income actually rose for the first several months of the pandemic. The initial shock hit consumers hard, but by May retail sales (excluding food services) had nearly regained all of the lost ground from March and April, and by June they were running above the long-term trend.

This bears repeating: U.S. retail spending has been running at record highs since June, well above expected figures. (These figures exclude restaurants and bars, which were specifically shut down.) Retail sales excluding food services grew as much between February 2020 and August 2020 as they did between May 2018 and February 2020. That's nearly two years of growth compressed into about half a year.

That, in turn, means that U.S. demand for foreign imports has grown as well. The total value of U.S. imports still isn't back to pre-pandemic levels, in part because the price of oil has fallen. The U.S. produces about as much oil as it consumes, but because the U.S. refinery complex is the most sophisticated in the world, America winds up importing low-quality crude oil from the rest of the world and exporting high-quality crude oil.

On the other side of the ledger, because demand from the rest of the world is weak, U.S. exports continued to fall through May, and since August have recovered more slowly than imports. The net result is that the trade deficit is the highest it has been since 2006 — that is to say, since before the decline in U.S. housing prices undercut the consumption boom of the mid-2000s.

It's not necessarily wrong to see the surging trade deficit as evidence against the wisdom of Trump's trade policies, which have done significantly more harm than good. A more constructive view, however, is to view it as a testament to policy competence. Not only was there aggressive monetary policy from the U.S. Federal Reserve, which lowered interest rates and provided capital to banks and businesses, but there was strong fiscal policy with the CARES Act.

A broader economic recovery will require even more fiscal stimulus, in the form of a second pandemic relief bill, which seemed possible if not likely until Trump called off talks with Congress on Tuesday. After November, perhaps, negotiators on both sides will see things in a different light — or maybe there will be different negotiators altogether.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.

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