February 27, 2019 Trade Policy Debate

Evidence that Tariffs Front-Running has Stalled Trump Trade Progress

February 22, 2019

By Alan Tonelson

Last Friday’s post on the morning’s slew of manufacturing data released by the federal government could have included one more report: the Commerce Department’s latest sounding on gross domestic product by industry. And although this read on how different major sectors of the economy have been growing (or not) isn’t a market mover, it’s useful for analyzing the trade policy debate – for it enables calculations on how changes in the U.S. manufacturing trade deficit (a major concern of President Trump’s) compare with changes in manufacturing output.

Because this perspective provides the kind of context lacking when trade deficit increases or decreases are examined in isolation, it represents a much better way to judge whether the president’s trade policies are succeeding or failing according to one of his own main yardsticks.

And the verdict stemming from this new Commerce report? Progress that had been taking place during Mr. Trump’s tenure in boosting domestic manufacturers’ trade-related fortunes has come to a halt – probably because of what’s been called tariff front-running. That is, the President’s actual trade curbs and, doubtless much more important, his threats of additional curbs, have led overseas producers and their U.S. customers to boost greatly shipments to the American market in order to avoid paying as many of the levies as possible.

Consequently, as of the third quarter of last year (the latest data made available by Commerce), the U.S. manufacturing trade deficit resumed its long-term pattern of growing faster than domestic manufacturing production.

Specifically, between the third quarter of 2017 and the third quarter of 2018, U.S.-based industry increased its output by 7.23 percent according to a measure of growth called value-added (before inflation). During the same period, however, the manufacturing trade deficit jumped by 12.45 percent.

As made clear by my previous post on the subject, these results both contrast with the second quarter findings – when manufacturing production grew by 8.02 percent while the trade deficit widened by just 7.23 percent – and reversed a trend that began pretty much when the Trump administration did.

Just as clear – the first major Trump tariffs (on steel and aluminum imports) were slapped on in late March. So their arrival, along with China levies that began in early July and the much more sweeping duties imposed in late September and strongly hinted at in June, surely super-charged America’s import system.

Even with this step backward, it’s still evident that, so far during the Trump years, domestic manufacturing is much less dependent on imports than before.  During the last year of former President Obama’s administration, for example, American manufacturing imports rose by 7.31 percent, while output expanded by only 4.53 percent – a pattern in place for most of the last twenty years.

But the real test of the Trump tariffs – at least concerning the manufacturing trade deficit – will come if and when U.S. trade flows settle into a new, post-tariff, normal, or one that follows the conclusion of the new, improved trade deals the President has promised. In that vein, the next chance to check these data will be April 19, when Commerce is scheduled to publish its fourth quarter and full-year, 2018 figures. Stay tuned!

ALAN TONELSON
Alan Tonelson, a columnist for IndustryToday, is founder of the RealityChek blog (alantonelson.wordpress.com), which covers manufacturing, trade, the economy, and national security. He has written for many leading publications on these subjects and is the author of The Race to the Bottom (Westview Press, 2000).

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