The March Trade Deficit and the Trans-Pacific Partnership

The jump in the March trade deficit, coupled with the weak job numbers for the last two months, should highlight the importance of including rules on currency in trade agreements. Such rules could ensure that the dollar does not remain over-valued and prevent the economy from reaching full employment.

The basic story would be fairly simple if so many people did not deliberately try to confuse issues. There are four types of demand in the economy, consumption, investment, government spending and net exports. Note that the category is “net exports,” not exports.

The point is that we create demand for the economy as a whole when we export more goods and services than we import. If we import more than we export, which means we run a trade deficit, then we are actually losing demand from trade. Our current trade deficit of more than $500 billion a year has the same effect on demand in our economy as if consumers took $500 billion from their paychecks each year and stuffed it under their mattress rather than spend it. This money is creating demand in other countries, not in the United States.

This trade deficit takes on more importance in light of the recent GDP and jobs data. There were many economists who were convinced that the economy was taking off. They were looking at the strong growth GDP growth of the second and third quarter of 2014 and the 300k rate of monthly job growth in the last four months of 2014. Looking at these data, many economists argued the Fed would soon have to raise interest rates to slow growth and prevent inflation.

Fewer people would likely make this case today. GDP growth in the first quarter was just 0.2 percent. Furthermore, with the March trade deficit coming in much higher than had been expected, the growth number will almost certainly be revised downward into negative territory. While weather clearly was a big factor, it is difficult to imagine first quarter growth would have been very strong even with better weather.

The jobs numbers have also been considerably weaker than in the fall. While weather was also a big factor behind weak March job numbers, even taking March and April together the pace of job growth was just over 150,000 a month. It will take us several more years to get back to full employment with this rate of jobs growth.

This is relevant to the Trans Pacific-Partnership (TPP) because it is difficult to see any force in the domestic economy that can spur enough growth to offset a high and rising trade deficit. In spite of what you hear from many economists (you know, the type that couldn’t see an $8 trillion housing bubble), consumption is actually high relative to income. The share of income that is being consumed is higher now than at any point in the last seven decades, except when consumption was driven by the ephemeral wealth from the stock and housing bubbles.

Investment is also near its long-term average as a share of GDP. It is difficult to tell a story as to why we should expect a large uptick in investment from current levels, although there is some room for growth in housing construction.

We could see more government spending, which would boost economic growth, but for political reasons that doesn’t appear likely. If Congress were prepared to embrace a plan for major spending on infrastructure, health care and clean energy, that could get us back to full employment, but not many people would bet on that prospect.

This leaves us with trade. If we don’t see a large reduction in our trade deficit there is no plausible way in which labor markets will tighten enough to allow workers to see real wages and get their share of economic growth. The TPP matters in this story because it provides a venue through which we could see a reduction in the trade deficit, if the deal included rules on currency values.

Currency values are central in the story of trade. When the dollar rises in value against other currencies, it makes goods and services produced in the United States more expensive. As a result we buy more imports because they are cheaper and our exports fall because they are more expensive. This is why the trade deficit has grown. The rise in the dollar in the second half of 2014 has priced many of our goods out of the market.

The TPP gave the United States an opportunity to address the problem of an over-valued dollar, but President Obama chose not to take it. This failure would likely condemn us to many more years of weak labor markets in which workers lack the bargaining power to secure their share of economic growth.

President Obama may pretend to be outraged that his allies on other issues are not supporting him on the TPP, but he surely knows basic economics. His trade deal is a step towards locking in large trade deficits and high unemployment. No one should be surprised that those who care about working people don’t want to go along for this ride.