Trump, tariffs, and trade have been all the rage for the past few weeks. Why? Should we care?
Let’s deconstruct the issue. Do trade deficits matter? Trump and his advisor, Peter Navarro, believe the answer is a resounding yes.
My opinion? My answer would also be yes, but not resounding. Yes, long-term trade deficits are probably a bad thing. Notice I said ‘probably?’ The problem with this issue, in my opinion, is two-fold. First, it’s extremely complex. Second, the long-run implications have never been proven or tested. That said, I believe:
Read on and I’ll explain my thoughts.
Welcome to this week’s Steak House Index update.
If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/
According to the IMF (the ‘International Monetary Fund’), the world’s annual GDP is almost $80 trillion today.
During the calendar year 2017, US nominal GDP increased by $833 billion … by an amount approximately equal to the market capitalization of Apple. At the end of 2017, US ‘current dollar’ GDP was almost $20 trillion — about 25% of the global total. Other than China — a distant second at around $11 trillion — no other country is close.
The objective of the SHI10 and this blog is simple: To predict US GDP movement ahead of official economic releases — an important objective since BEA (the ‘Bureau of Economic Analysis’) gross domestic product data is outdated the day it’s released.
Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth. In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending. Consumer spending is clearly a critical financial metric. In all likelihood, the most important financial metric.
The Steak House Index focuses right here … on the “consumer spending” metric. I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.
If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.
In January, the US exported goods and services valued at $200.9 billion. January imports totaled $257.5 billion. The math is easy, as is the conclusion: We’re importing a LOT more stuff than we’re exporting. A fact easily seen below:
You can see, in the above graph, the trend shows an ever-growing trade deficit. Again, this simply means the US is importing a lot more stuff than we’re exporting.
This is a long, long term trend. The US moved from trade ‘surplus’ to trade ‘deficit’ in 1971 and, with few exceptions, we’ve imported more stuff than we’ve exported every year since. 2006 was the worst year ever: Our deficit exceeded $761 billion that year!
The 5-year chart below shows the same disturbing trend.
As I mentioned above, this is a 5-year chart. What did the 5-years of deficits total? A bit over $2.5 trillion. Hmmm…. that’s a lot of money. (Here’s a chart of all balance of trade statistics since 1960, for you number lovers: https://www.census.gov/foreign-trade/statistics/historical/gands.pdf)
So, again, does it really matter? Yes, it does. Here’s why:
Which would you choose?
Theory suggests this “problem” should self-correct. Over time, as the US trade deficit grows larger and larger, our currency value should shrink more and more. Eventually making US exports MUCH cheaper for other countries to buy. And imports EXTREMELY expensive. Theory suggests that when this finally happens, the US would shift from ‘deficit’ to ‘surplus’ and the trend would reverse.
The problem, frankly, is we’ve been “deficit spending” since 1971. The shift hasn’t occurred. The US dollar is so popular, so highly revered, we haven’t seen the value erosion almost every other country would experience under the same conditions.
Thus, the Trump administration is trying to change the paradigm. And artificially speed up the process using tariffs. Will it work? No. But it may result in ALL imports becoming a lot more expensive as our trading partners retaliate with tariffs of their own.
And then, my friends, we will be importing much of the inflation that globalization and trade deficits have held at bay for decades.
Clearly, we’re living beyond our means. And no where is this more obvious than in our pricey steakhouses! Is Lobster Mac & Cheese popular this week? Let’s take a look.
Well, steaks are selling locally, but apparently the “northeasterners” — or whatever they call those horrible storms in the northeast — are taking their toll. Almost no one is heading out for a pricey steak this Saturday in Boston or Philly. But the New Yorkers seem to be braving the weather:
The longer term trend reflects continued economic strength. We’re seeing week-over-week improvement in all west-coast markets. But from Chicago east, both weather and T-Bone consuming conditions seem a bit more challenging:
The SHI10 tells us economy remains strong. The trade deficit is definitely a problem, and we should be seeking solutions. But a trade war is not that solution.
C’est la vie.
– Terry Liebman
2 Comments
Terry,
Thanks for the 3 reasons why it matters. Found that to be a concise and easily digestible way to understand the trade deficits. I will be sharing this specific blog with quite a few people.
Great blog as usual. Thank you.
The idea of taxing imports to reduce the trade deficit makes perfect sense in an ideal world. The problem, as you mentioned, is that things just cost more to make here. This is a result of all the things in place here … regulations, unions, minimum wages, etc. Not judging these, only pointing out that they limit our ability to compete pricewise. This will probably be exacerbated with higher costs for products leading to need for higher wages making product cost more … a vicious cycle. I guess I am saying that resolving this seems hopeless. My real concern is about the debt. This amount is unprecedented in history. If (or probably when) it collapses, the impact is completely unknown. I would really like to see our politicians address the debt!