Trump’s trade deficit victory has plenty of caveats attached

New data shows President Donald Trump may be poised to deliver on one of his biggest economic promises: Reducing the annual U.S. trade deficit with China and the world.

Scratch the surface, though, and that accomplishment comes with plenty of caveats attached and even what some economists see as worrying signs for the U.S. economy.

November trade data released Tuesday showed that the U.S. goods and services deficit decreased by 0.7%, or $3.9 billion, in the first 11 months of 2019 from the same period a year earlier. That puts the annual deficit on track to fall for the first time since Trump took office, promising to rebalance America’s economic relationship with the world.

It also, according to the administration, illustrates that despite the continuing doubts of many mainstream economists, Trump’s trade policies and his tariffs are contributing to a steady narrowing of the deficit that ought to be causing forecasters to upgrade their expectations for economic growth this year.

“Clearly the Trump tariffs are working,” said White House adviser Peter Navarro.A “phase-one” deal with China—scheduled to be signed in Washington Jan. 15—should help as well, Navarro said. Most of the tariffs now in place on some $360 billion in imports from China are due to remain despite the deal, which means a drop in Chinese imports should continue. The Asian nation has also agreed to purchase an additional $200 billion in U.S. exports.

“We should see continued improvement in the China numbers as tariffs remain largely in place while purchases should increase significantly across our agricultural, energy, manufacturing, and services sectors,” Navarro said.

The U.S. tariffs so far have clearly had an effect on trade with the world’s second-biggest economy. Imports from China continued a steep drop in November, declining for the sixth straight month and reaching the lowest since March 2013.

But the numbers released Tuesday also point to dueling realities facing the U.S. economy.The biggest contributor to the drop in the deficit from January through November was the continuing boom in shale oil. In nominal terms, the U.S.’s petroleum-trade shortfall with the world fell to $13.1 billion in the first 11 months of 2019, more than $35 billion less than it was in the same period of 2018.When it comes to the rest of the U.S. economy—including a manufacturing sector Trump has promised a revival of—the trade picture looks very different. The non-petroleum deficit grew almost $20 billion to $766.2 billion in the first 11 months of 2019, putting it on track to beat 2018’s full-year record deficit of $824.8 billion.

Demand Signs

The other major factor driving the narrowing of the U.S. trade deficit was a decrease in imports rather than an increase in exports. That is often a sign of weaker demand for the U.S. rather than an economy poised to record another burst of growth.

It also creates a statistical quirk that has long been the source of a bitter debate between advocates of tariffs like Navarro and other economists.Because of the way gross domestic product is calculated, a reduction in imports contributes to faster headline growth. Yet most economists argue that is an accounting anomaly rather than a reason to cheer, especially if it is a sign of a weakening demand rather than stronger domestic production.

The slowdown in imports has been accompanied by one in exports. It also has been exacerbated by companies drawing down on inventories built up earlier this year to try to get ahead of tariffs, according to Eliza Winger, who covers the U.S. economy for Bloomberg Economics.

The import contraction in the fourth quarter of last year appeared to be the largest seen since the 2007-2009 recession, which marked the last time the U.S. saw a significant contraction in the trade deficit, said Greg Daco, chief U.S. economist for Oxford Economics.By his calculations, net exports would add 1.2 percentage points to GDP growth in the fourth quarter of 2019—also the biggest such contribution seen since the crisis a decade ago. That it was likely to make up half the 2.4% growth Daco is forecasting for the quarter is not necessarily encouraging.

Navarro insists that the tariffs have contributed to a re-shoring of manufacturing and broader investment in the U.S. economy.

It’s not clear from the data that has in fact happened, however. Last year saw a slump in business investment, with many companies blaming uncertainty related to Trump’s trade policies for holding off on big capital investments. Other data has pointed to a slowdown in U.S. manufacturing last year.

It’s also unclear how much of a political asset a small reduction in the trade deficit in 2019 is going to be in an election year. At more than $562 billion, the U.S. goods and services deficit in the first 11 months of the year is already more than $60 billion higher than it was in all of 2016, the year Trump was elected.

Over the course of Trump’s term, the deficit is clearly up, so in that sense he has not succeeded, said Brad Setser, a senior fellow at the Council on Foreign Relations.

“What he has shown is if you put big enough tariffs on, that can change both the bilateral balance of trade,” Setser said. “What he hasn’t shown is that his tariff-based strategy can generate a revival in U.S. manufacturing.