Thursday, March 8, 2018

Ready, Fire, Aim!

President Trump has been understandably concerned about our international trade deficit, which rose from $53.9 billion in December to $56.6 billion in January - the highest in almost ten years.  Indeed, it has been getting worse since Trump's election.

But, it is easy to attach too much significance to this.  The U.S. both imports and exports different types of oil.  In January, our imports rose more than expected, while our exports rose less than expected.  Big swings make this data point unreliable on a monthly basis.

Amid much disagreement, the Administration argues that tariffs will increase the costs of certain  imports, which will drive down demand for those imports, decreasing the deficit.  Of course, this conveniently ignores the impact of retaliatory actions by other nations.  Uncertainty is growing, which makes it difficult for multi-nationals to plan.

Meanwhile, two other things are working to reduce that trade deficit.  First, ignoring oil, demand for our exports is increasing as GDP growth increases worldwide.  As foreigners get more wealthy, they want more American goods.  Second, the dollar has been falling, which makes our exports cheaper for foreigners.  Unless the Fed gets more aggressive with increasing our interest rates, I don't expect much strength in the dollar in the near future, meaning our exports should rise at a faster rate.

The point is this:  There is more than one way to reduce the trade deficit than starting a trade war!