Yesterday the Commerce Department announced that the overall trade deficit rose to $50.1 billion in July – bad, but still in the $37-55 billion range where it has hovered for years. Only by doing a deep dive in the data – removing services, food and oil – can you arrive at the really bad news in the report – that the trade deficit in manufactured goods shot to yet another all-time high in July of $69.3 billion, beating the previous record of $68.4 billion set in February earlier this year. Here’s the chart: Manf’d Goods Balance of Trade.
Over the past few months, we’ve heard a lot about the Trump administration’s “trade war” with the rest of the world in an effort to restore a balance of trade. But so far, there’s no evidence of any positive results to be found in the trade data. What’s going on here?
Several things. First of all, it’s important to note that, for all the talk we’ve heard about this issue, so far it’s been mostly talk. There’s been talk of slapping tariffs on another $200 billion of imports from China. More recently, that’s escalated to include all $500-some billion of their imports. There’s been talk of imposing tariffs on all auto imports from the European Union. There’s been a lot of talk about tough negotiations to revise the North American Free Trade Agreement with Mexico and Canada. But the reality is that, so far, the Trump administration has imposed small tariffs on aluminum and steel imports and on about $50 billion of Chinese imports. That’s a small drop in the bucket compared to the $3 trillion of imports from around the world. In essence, the trade war really hasn’t started yet. The U.S. and the rest of the world have simply been exchanging steely stares across the battlefield. The only shots fired have come from BB-guns.
If anything, other Trump economic policies may actually have exacerbated the deficit. The tax cut that went into effect this year has boosted the economy by as much as 4% (according to the most recent GDP data), but the trade deficit in manufactured goods has worsened by 18% since the tax cut went into effect. It’s clear that much of the tax cut has been spent by Americans on more imports. It’s actually boosted the global economy much more than the U.S. economy.
However, all that may soon change. The tariffs on an additional $200 billion of Chinese imports has been on hold during a public comment period. That period actually ends today. So the tariffs may very soon be implemented. The Chinese will begin feeling the pain and, admittedly, so too will American consumers. They’ll feel that pain until manufacturing begins to return to the U.S. and drive up wages.
The talk of tariffs has so far had little effect on corporate supply-chain strategies. Corporate leaders still think it’s all a bunch of bluster by Trump, and that all will return to normal if he manages to win some token concessions from other countries. They’re not going to revise their sourcing strategies and investments in foreign countries until they really start to feel pain from the tariffs. But there is evidence that it’s beginning to happen. Earlier this week, Ford announced that it was cancelling plans to begin importing a car model from China, explaining that the expected tariffs on those cars would wipe out what was already a thin profit margin. GM already imports the Buick Envision model from China. If Ford sees importing cars from China as a losing proposition, surely GM is considering similar action.
Then there’s the new trade deal between the U.S. and Mexico which promises to shift some car and parts production back to the U.S. It’s not a signed deal yet, but it’s coming.
So the message here is to be patient. But at the same time, the Trump administration needs to feel some sense of urgency to start producing results. The tax cut will only carry the economy so far and for so long. Real economic reform is totally dependent on a re-balancing of trade that hasn’t actually begun yet.