Part 1:
Sometimes I find it helpful when I think through a problem to state the obvious. So here it goes. Stating the obvious when it comes to trade, the main reason the US has a net trade deficit with the rest of the world is because we consume more than we produce (and we’re producing just about all we can). The “net” part of “net trade deficit” is important. It’s entirely normal for two countries to have a bilateral trade surplus/ deficit, and usually the reason is actually positive and just has to do with specialization (without denying that unfair trade practices exist and can be part of the problem too). The problem of consuming more than you produce only comes with a net trade deficit.
Also keeping things simple, the benefit of a trade deficit is international investment in the country with a deficit. We sell goods in dollars. Those dollars find their way back to the US as investment (more common) or find their way into the purchasing country’s reserves (less common). Desiring a more balanced trade picture implies desiring a more balanced investment picture. This is a common outcome in economics—downside from one perspective brings upside from another. For the US, there is also the fact that the trade deficit is partly driven by vagaries of the US tax code – so think of the trade deficit as something that also accrues to US companies’ bottom lines, i.e. profits, and stock prices as a result.
Going a little deeper, if our net trade deficit is because we consume more than we produce, the solution is to consume less or produce more. Of course, no one would consider the first option a “solution,” so really the Trump administration is looking at the second. Make the economy more productive. So really the aim is to reorganize the US economy around President Trump’s belief system about economic efficiency. Since our focus is always on markets, the market’s judgment thus far has been that the president has badly missed the mark in doing this in an economically productive way. Keep in mind that for more sustained productivity growth, we need strong labor markets and business investment, both of which are at risk if the tariff situation continues as is. As we note often, whether a policy is broadly good or bad isn’t determined by markets, but markets usually are effective at understanding the impact of policy on the drivers of market returns.
We’re getting more evidence of that today, as we did when the S&P 500 put in one of its best days in the last 50 years on April 9. The catalyst for both: the president backing off from a more extreme trade positions.
To be continued…
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