Eitan Urkowitz: This is Eitan Urkowitz at the Peterson Institute for International Economics. Joined with me is Gary Hufbauer, senior fellow at the Institute. Thank you for joining me Gary.
Gary Clyde Hufbauer: Thanks.
Eitan Urkowitz: So, the Trump administration recently announced that they're considering new ways of measuring the United States trade balance with the rest of the world. How does the United States currently measure its trade balance?
Gary Clyde Hufbauer: Well, we take all the goods and services, I want to emphasize services, that we import from other countries and we take all the goods and services that we export to other countries and the difference between imports and exports is the trade deficit as currently measured. The current number is about $500 billion deficit annually. That was true in 2015, 2016, and probably be pretty much the same in 2017.
Eitan Urkowitz: So, what are the changes that the administration proposed?
Gary Clyde Hufbauer: Well, they considered, they are now saying they never intended to do that, but what they were considering was to take goods which are imported into the United States, typically in bulk like a lot of iPhones or maybe a lot of cars and then some of them are exported to other countries, often to Canada or Mexico, but it could be to Brazil or wherever.
They were going to take those exports from the stuff which is imported and never was manufactured or nothing done in the United States. They would take those re-exports and knock them out of the export total.
Well, that’s an interesting idea, but what they weren’t going to do is take the imports and knock them out of the import total. So, you have still all the imports coming in. You have fewer exports and things would look worse. And this is an administration, which is very fixated on the trade deficit.
So, for them a worse number gives them more ammunition to go after it.
Eitan Urkowitz: Well, would this have been an unprecedented move or are there any other countries that do anything like this, measure the trade balance this way?
Gary Clyde Hufbauer: No, I mean this is completely off the map and I assume that’s why they dropped it. I mean, it's completely inconsistent with the way statistics are done internationally.
There are little things on which we differ from foreign countries. The trade figures don’t always match up that we do and they do, but this was a huge deviation.
Eitan Urkowitz: So, since the administration is so focused on reducing the trade deficit, what do you think they should do in order to reduce the trade deficit?
Gary Clyde Hufbauer: Well, just to state what they are talking about doing, they are talking about renegotiating NAFTA with a view to compelling Mexico to reduce its trade surplus with the United States which is our trade deficit with Mexico that figures about $60 billion. They want to bring it down.
They also want to do something with China where the figure is about $300 billion annually, and with Germany where the figure is about $70 billion.
So, they want to go after a trade agreement by trade agreement. As far as I know, very very few economists agree that that will work. If you squeeze the deficit with Mexico, you will then probably enlarge with another country which can produce similar goods that we no longer import from Mexico and the overall deficit will be the same.
The only way you can really reduce the deficit which reflects more spending by the United States than we produce in the United States is to produce more or change the exchange rate that is devalue the dollar so that our goods are cheaper abroad than they are currently and foreigners want to buy more of them. Those are big macro-economic changes. That’s not what this administration is talking about.
Eitan Urkowitz: Thank you Gary.
Gary Clyde Hufbauer: Thank you.