Tariff Mistake Smoking Gun: Trade Deficit Soars, Expect Negative GDP Revisions

Senior White House economic adviser Larry Kudlow speaks during a briefing at the White House in Washington

President Donald Trump's "America First" policy led to new trade agreements with Canada and Mexico and has driven the administration to seek a more favorable deal with China.

The President has used similar studies to impose tariffs on steel and aluminum and has threatened to apply them to imported cars and vehicle parts. Trump has complained that a stronger dollar has weakened his hand in his trade wars and put a damper on United States growth. The goods deficit was a record.

Lawrence Summers, a Harvard economist and former chairman of President Barack Obama's National Economic Council, told The Times that "the trade deficit is a awful metric for judging economic policy".

Trump and his supporters have cast the blame in part on the US Federal Reserve, arguing that its decisions to hike rates previous year contributed to the strengthening of the dollar.

But there are signs that Trump is nearing a new deal with Beijing. "We are going to start whittling that down, and as fast as possible", Trump said after his trip to Asia in November 2017.

There are competing forces inside the Trump administration that are debating how wise it would be to lift the duties on the first day of a deal because keeping some of the tariffs in place would allow the U.S. to maintain leverage.

"Overall for the year, trade policies didn't have an overly dramatic effect on the deficit", he said. The survey also supported data showing that business investment has slowed significantly due to the uncertainty surrounding the trade policy. He's now pursuing separate deals with China and the European Union.

Still, tariffs so far have proven to be a blunt weapon. "After accounting for higher tariff revenue and gains to domestic producers from higher prices, the aggregate welfare loss is $6.4 billion (0.03% of GDP)".

That was offset by the gains from protectionism derived by US producers benefiting from the tariffs, the economists found. If that pattern holds in the December data released Wednesday-and economists surveyed by Bloomberg predict it will-the trade deficit will have widened to about $610 billion in 2018. "When things are booming we consume more imports". Meanwhile, the surplus in services kept rising, hitting a record $270.2 billion past year.

A second study by four economists from the University of California, Los Angeles; Yale University, the University of California, Berkeley; and Columbia University reached the same conclusion. Economists at the Institute of International Finance last week calculated Chinese retaliatory tariffs alone were causing roughly $40 billion a year in lost US exports.

Lighthizer has said the two countries plan to set up a system that requires regular consultations at various levels of the United States and Chinese governments to address irritants. If the tariffs continue, about US$165 billion worth of trade would be redirected each year, they added. "It's pretty unclear that this trade war is a net win for the economy at this point".

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