The Good, the Bad, and the Ugly
The Good: The Trade Deficit is shrinking.
The Bad: Trade is shrinking.
The Ugly: Protectionism is growing.
The deficit in U.S. trade in goods and services shrank to $26 billion in February, from a revised $36.2 billion in January. This is good news. On the other hand, the total value of imports and exports has been shrinking for several months because of reduced aggregate demand at home and abroad. In February, our exports rose slightly, by $2 billion, while our imports declined $8.2 billion. Other things equal, our small uptick in exports in February along with a more substantial decline in imports, suggests that our trading partners are experiencing more demand weakness than we are.
The trade deficit (imports>exports) is a negative in domestic GDP calculations, but a shrinkage in the deficit boosts GDP as a matter of arithmetic-a minus times a minus equals a plus. With domestic consumption and investment declining, the shrinking foreign trade deficit is a welcome positive influence. However, if the dollar continues to strengthen because of an apparent "flight to quality" among currencies, the trade deficit is unlikely to continue to shrink and provide GDP stimulus. As I've said here before, I feel about a strong dollar as St. Augustine felt about chastity. "Lord, make me chaste, but not just yet," he prayed. I say, "Lord, give us a strong dollar, but not just yet."
Our politicians probably don't lose much sleep over our trade deficit, but they apparently can't resist the temptation to interfere with trade (beggar my neighbor) in an attempt to stimulate the domestic economy at the expense of our trading partners.
"Buy American" was put into the stimulus package. It sounds innocuous enough, but how would we feel about "buy German" or "buy French" in today's world where there is not enough aggregate demand to keep all workers fully employed?
After years of U.S. violation of the trucking provisions of NAFTA, Congress finally made it official in recent legislation outlawing Mexican trucks, prompting Mexico, naturally enough, to announce tariff increases on U.S. exports. Does Congress not understand that we can't shift our problems onto our trading partners without the same coming back at us? The Great Depression of the 1930s might have been a mere recession without our Smoot-Hawley tariff that triggered a world-wide trade war.