By John Hood
RALEIGH — Hundreds of thousands of North Carolinians work in companies that sell goods and services all around the world. They’ll prosper, as will our state, to the extent we knock down barriers to our exports.
Few disagree with that goal. Differences of opinion arise when we get specific. Consider the recent news that the United States ran a trade deficit of $859 billion last year. In dollar terms, that’s the largest such deficit in the country’s history. It’s also a 27% increase over the trade deficit for 2020.
At the risk of sparking the first big disagreement, I should say at the outset that I don’t think the trade deficit is itself an issue of critical importance. It doesn’t signify, for example, that our exporters took in on the chin. In fact, goods exports shot up 23% last year to $1.8 trillion, also a record amount, as economies around the world began to recover from the COVID crisis and their consumers gobbled up American-made products.
Of course, American consumers also gobbled up goods imported from abroad. And America’s service industries didn’t have as good a year, in part because of continued weakness in education and tourism (if foreigners come to the U.S. to study or travel, their expenditures constitute exports).
So, the net result was a trade deficit — but that hardly made it a crisis. American consumers got products they highly valued. And our service sector will likely bounce back more strongly in 2022 as COVID-induced fears and restrictions fade. More fundamentally, because America remains one of the best places to invest money, we are going to run trade deficits of some size for the foreseeable future. It’s an inescapable fact of accounting: if we run a capital-account surplus, we must run a current-account deficit, the vast majority of which will be a trade deficit.
Now, let’s talk about China. America’s $355 billion trade deficit with that country represented 41% of the total. Again, exports to China rose but imports from China rose much more.
Remember the deal former President Trump negotiated with the Chinese regime two years ago? It required the Chinese to purchase an additional $200 billion in American imports by the end of 2021.
The deal didn’t stick. Chinese imports from American firms turned out to be only 57% of the “required” figure. Moreover, since the 2020 agreement came after the former president initiated a trade war, setting off cycles of retaliatory tariffs, the real point of comparison would be exports to China now vs. exports to China before the tariff escalation. By that metric, the policy has been an abject failure. Our exports to China haven’t yet returned to the pre-trade-war baseline.
I’m not arguing that the Trump administration bungled the execution of the agreement during its last year, or that the Biden administration bungled it during 2021. I’m rejecting the entire premise that the way to help American industries sell more overseas is to negotiate sales quotas with national governments. Exports to China went up last year but exports to our other trading partners, especially in Europe, went up more. The latter didn’t happen because a bunch of politicians set sales quotas.
We need to stop trying to manage trade and focus instead on slashing taxes (tariffs) and increasing our economy’s productive capacity.
With regard to the first goal, the best way to encourage the governments of our trading partners to lower tariffs and other barriers to accessing their markets is to offer reductions in our existing barriers to their goods and services — not to raise tariffs first and seek negotiation later. As recent experience has shown, that tends to provoke retaliatory tariffs, not productive discussion leading to net reductions in trade barriers.
And with regard to productive capacity, North Carolina leaders and their counterparts in Washington have full power to act on their own. Reforming our systems of taxation, regulation, education, and infrastructure would help all our businesses, including exporters, to grow and thrive.
John Hood is a John Locke Foundation board member and author of the new novel Mountain Folk, a historical fantasy set during the American Revolution (MountainFolkBook.com).