In the latest surprising announcement to emerge from the Trump White House, the WSJ reports that the Trump administration is considering changing the way the U.S. trade deficit is calculated, a shift that would make America's trade gap appear even greater than it has been in recent years, potentially making future trade skirmishes and wars with America's export-heavy trade partners far more likely.
According to WSJ sources, the White House is considering not counting re-exports from the US trade balance: i.e., excluding from U.S. exports any goods first imported into the country, such as cars, and then transferred to a third country like Canada or Mexico unchanged. Such an approach would inflate trade deficit numbers because it would typically count goods as imports when they come into the country but not count the same goods when they go back out.
As the WSJ notes, data on trade balances and surpluses, widely followed by Congress, are at the center of a political battle over whether existing trade agreements should be retained, renegotiated or tossed out altogether. Should the change be implemented, it would have a stark effect on data involving countries that have free trade deals with the U.S., and in some cases the new methodology would even change a trade surplus into a trade deficit.
As the charts below show, the total impact of the "redefinition" would amount to roughly $250 billion per year, and would have the most acute impact on Nafta partners, Mexico and Canada, which are the top two destinations for US re-exports.
Ironically, it was just one week ago that we explained that in the new Trumpian (ab)normal, FX traders would soon need to learn a new skill: "how to read trade flows." Today's WSJ story confirms not only that, but suggests that even more newly acquired skills are on deck. Meanwhile, even more opposition in government appears to be emerging, this time among bean counters tasked with estimating US trade flows who are opposed to the proposed trade adjustment:
Career government employees objected last week when they were asked to prepare data using the new methodology, according to the people familiar with the discussions. These employees at the U.S. Trade Representative’s office complied with the instructions, but included their views as to why they believe the new calculation wasn’t accurate. One person familiar with the discussions said the employees were told the new calculations were to be presented to members of Congress.
There is of course the possibility that this latest leak of Trump economic tactics is merely a trial balloon to gauge the market response:
Trump trade officials said the idea is part of an early discussion and that they are examining various options. It is unclear whether the administration would adopt any new approach for measuring trade as part of official government data, or just use the higher deficit calculation to make the case for new trade deals.
“We’re not even close to a decision on that yet,” said Payne Griffin, the deputy chief of staff at the office of the U.S. Trade Representative. “We had a meeting with the Commerce Department, and we said, ‘Would it be possible to collect those other statistics?’”
A spokeswoman for the Census Bureau which calculates the trade deficit said she wasn’t aware of discussions about changing the data.
Still, should the new calculation be implemented, some say it would lead to a more accurate picture of the value of products produced in one country and consumed in another. With their focus on domestic manufacturing, Trump administration officials want to measure exports of American-made products, not items shipped from abroad and re-exported.
However, several economists interviewed by the Journal, were not impressed and were uneasy with fully excluding re-exports from exports but not imports. “As a statistician, you generally want symmetry,” said Steve Landefeld, former BEA director. “If you’re going to begin to exclude re-exports from the U.S. export figures, you probably for reasons of symmetry” would want to adjust import figures as well.
Some further considerations:
Re-exports are currently included in “total exports” figures most frequently cited and used by the Census Bureau to calculate the trade balance. On the imports side, officials are also exploring switching to “imports for consumption,” a slightly narrower way of measuring imports that would make less of a difference in the overall balance.
The Obama administration, which resisted calls from critics of its trade policy to change the figures, argued that excluding items re-exported from the U.S. export column but including them in U.S. imports could inflate the trade deficit or trim surpluses. In July 2010 Obama also promised to double American exports in five years. He failed.