October 29, 2019
By Alan Tonelson
If only the Commerce Department’s data on gross domestic product (GDP) by industry didn’t come out on a basis timelier than once a quarter. For they’ve provided uniquely valuable information on how well the Trump administration is faring in its efforts to (1) reduce the humongous U.S. manufacturing trade deficit, and (2) reduce domestic industry’s reliance on imported parts, components, and materials, and boost total output and employment over the long-term by ensuring that more of the value in these manufactured products are Made in the USA.
More specifically, the data (whose latest edition came out this morning) shed light on the crucial question over whether the best business model for domestic manufacturing is that recommended by traditional trade theory, or whether an America First-type approach is more effective. The former, of course, holds that output of any kind is maximized by capitalizing on the principle of comparative advantage, and encouraging U.S.-based companies to use whatever inputs are made more efficiently abroad. The latter insists that such reliance on foreign inputs deprives the economy of the enormous output gains that are possible by encouraging growth in these very inputs.
Sadly, however, the reasonably clear analytical skies that permitted a reasonably clear verdict to be returned during the first two years of the Trump era in trade are rapidly clouding up, for a variety of reasons. And much of the growing confusion has been created by the President himself.
During Mr. Trump’s first two (nearly) full years of the Trump administration (keeping in mind that the President didn’t take office until late January, 2017), his America First-style policies were looking pretty impressive. (It’s true that no new tariffs came on during the President’s first year. But he did put the kibosh on a major trade agreement signed by his predecessor, the Trans-Pacific Partnership, and made clear that levies were on the way.)
Since Mr. Trump actually began imposing tariffs in early 2018, however, the results have been harder to interpret for two main and related reasons. First, the administration’s tariff decisions have oscillated pretty dramatically, featuring not only steps to put in place, threaten, suspend, and remove such levies, but actual and threatened tariff rate changes on big chunks of imports (especially from China). Second, these policy swings have produced lots of “tariff front-running” – that is, U.S. importers speeding up their foreign purchases in order to avoid paying higher tariff-ed costs.
And this overall picture is exactly what’s been borne out by today’s figures (which incorporate revisions going back to 2014). The table below shows the new annual totals from 2011 (when the current economic recovery finished its early rapid bounce-back phase and settled into a more durable pattern) to 2018, The (slightly) revised numbers make clear that during the first two Trump years, domestic manufacturing did a much better job of generating healthy growth without ballooning manufacturing trade deficits (which reflect in part growing industry dependence on imported inputs) than during the previous Obama administration years.
The figure in the left-hand column represents U.S.-based manufacturing’s growth during the year in question (according to a gauge called “value added), the middle column represents the growth that year of the manufacturing trade deficit, and the right-hand column shows the ratio between the two growth rates (with the trade gap’s growth coming first). The higher the ratio, more closely linked manufacturing output growth is to the expansion of the manufacturing trade deficit. All figures are in pre-inflation dollars.
2011: +3.93 percent +8.39 percent 2.13:1
2012: +3.19 percent +6.27 percent 1.97:1
2013: +3.36 percent +0.77 percent 0.23:1
2014: +2.93 percent +11.78 percent 4.02:1
2015: +3.72 percent +13.65 percent 3.67:1
2016: -1.19 percent +4.66 percent —
2017: +3.99 percent +3.16 percent 0.79:1
2018: +6.23 percent +3.96 percent 0.64:1
In other words, whereas during the Obama years, the manufacturing trade deficit nearly always expanded considerably faster than manufacturing output (and 3.67 and 4.02 times faster in 2014 and 2015), the first two Trump years saw both significantly higher output growth per se, and output growth that topped trade deficit growth. During 2018, moreover, numerous tariff were imposed, and not merely threatened.
This year, however, saw a major change. As shown below, the ratio of manufacturing output growth to manufacturing trade deficit growth returned to levels resembling the worst of the Obama years. And overall growth itself was feeble in comparison.
2Q 2017 – 2Q 2018: +7.00 percent +7.83 percent 1.12:1
2Q 2018 – 2Q 2019: +2.03 percent +7.27 percent 3.58:1
But here’s where the tariff front-running comes in, especially in the huge volume of trade with China – as made clear here. Unfortunately for trend-spotters, however, the administration’s success in fostering strong manufacturing output performance while weaning industry from imports won’t become any easier to identify anytime soon. The President’s China trade policies, after all, are likely to remain mercurial. Further, the General Motors strike and Boeing’s safety problems are sure to distort the production numbers for at least the next quarter or two. Add a still-sluggish world economy that, along with foreign retaliatory tariffs, will keep weighing on U.S. exports, and you get uncertainty that could even dwarf that supposedly paralyzing American business investment.
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).