August 9, 2018 - By Jay Rempe and John Newton - As a presidential candidate and throughout his time in office, President Trump has committed his administration to reducing the U.S. trade deficit in goods and services.

According to the administration, the trade deficit is evidence that the U.S. is "losing" in international trade and could hinder growth in U.S. gross domestic product. By reducing the trade deficit, the administration seeks to accelerate economic growth and job creation in the U.S.

A trade deficit or surplus is a financial accounting of the flow of goods and services between one country and the world. A trade deficit occurs when a country imports more than it exports. Trade deficits and surpluses are influenced by a variety of factors, including currency values, consumption, savings and investment rates.

The U.S. has run a negative trade balance for nearly 50 years. In 2017, the trade deficit was $552 billion.

Various factors can impact trade's ebbs and flows. For example, following the recession in 2009, U.S. consumption levels fell dramatically. As a result, imports into the U.S. dropped and the trade deficit declined to the lowest levels since 2001.

While the U.S. has a trade deficit in a number of good and services, U.S. agriculture is one of the few sectors that consistently runs a trade surplus. The agricultural surplus in 2017 was $17.2 billion. For 2018, the U.S. Department of Agriculture projected U.S. exports at $142.5 billion and imports at $120 billion. If realized, this would result in a trade surplus of $21 billion, up 22 percent from 2017 and the highest level since 2014.

The administration is attempting to address the overall trade deficit on multiple fronts simultaneously, including renegotiating the North American Free Trade Agreement, revising the Korea-U.S. free trade agreement, launching a Section 301 probe against China and imposing section 232 tariffs on imports of steel and aluminum.

For agricultural producers on the front lines of these trade disputes, two big questions emerge: First, are trade deficits inherently bad? And, second, is the U.S. losing to the rest of the world by having such large trade deficits?

Economists do not unanimously agree that a reduction in the deficit will lead to economic growth and job creation.

Those in favor of trade argue that trade deficits follow gross domestic product, that is, they are influenced by strong consumption levels and downward pressure on currency values through the lack of savings and investment. Those against trade deficits claim they weaken GDP and can be a threat, because the country is buying more than it is selling.

The first theory is supported by evidence. U.S. GDP continues to grow and the U.S. economy is consumer-driven—meaning Americans are more prone to spend than save. In this context, imports are an important component of meeting consumer demand. When consumers are spending and the economy is growing, the U.S. trade deficit widens. When consumers cut back on spending and the economy is shrinking, the trade deficit narrows.

The U.S. tends to run a trade deficit because it is the world's largest, most dynamic economy. A growing trade deficit, if anything, indicates the underlying strength of the U.S. economy.

In response to the second question, the U.S. isn't inherently a loser or winner because it has a trade deficit. Countries do not trade. People and businesses trade. When trade happens, the transaction wouldn't occur unless both the seller and purchaser are satisfied. And presumably, both parties are made better off by the transaction.

That's not to say there aren't losers from trade. There are—mostly producers who are unable to compete with imported products. A trade deficit, though, isn't the reason for the losses. Rather, it is competitive advantages in the marketplace. So, the U.S. is not losing; we are merely competing in markets in which we have a competitive advantage over others.

While the administration has made reducing the trade deficit a top priority, there is no evidence to suggest it is a drag on the U.S. economy. Moreover, the trade deficit reflects the strong purchasing patterns of U.S. consumers. It also reflects the higher per capita income in the U.S. relative to the countries we trade with.

The existence of a trade deficit is not evidence of bad trade agreements, unfair trade practices or a lack of American competitiveness. It is an accounting of the billions of transactions by individuals and businesses across the globe competing to improve their profitability and economic wellbeing. That's capitalism, and that's the American way.

What's not capitalism, and not the American way, however, are unfair trading practices that put U.S. businesses, including farmers and ranchers, at an unfair competitive disadvantage. For these challenges, the World Trade Organization has dispute-settlement mechanisms. Tariffs that ultimately come full circle and hurt farmers and ranchers should not be the dispute-settlement mechanism.

The $12 billion package of agricultural assistance announced by the administration will provide a welcome measure of temporary relief to farmers and ranchers who are experiencing the financial effects of the trade war. However, our long-term emphasis should continue to be on trade and restoring markets.

(Jay Rempe is senior economist for the Nebraska Farm Bureau; John Newton is chief economist for the American Farm Bureau Federation.)
Reprinted with permission: California Farm Bureau Federation