Mar 19, 2015 - 1:45pm

The Big Lie: The Trade Balance With Agreements

Senior Vice President for International Policy

As noted recently in the Nelson Report — a newsletter reporting on economic and trade developments in the Asia-Pacific region — trade critics in recent weeks have repeatedly shown they are “perfectly happy to use the ‘big lie’ technique” in a “re-cycle of many already discredited arguments.”

Nowhere is this more evident than with regard to the trade deficit and trade agreements.

This is curious because the trade balance is a poor measure of whether any particular trade policy is successful or whether a nation is prospering. In recent decades, the U.S. trade deficit has expanded during periods of vigorous economic growth and job creation (e.g., the late 1990s) and contracted during times of economic distress (e.g., the 2008-2009 financial crisis).

If the latter is “success,” who wouldn’t prefer “failure”?

But this has never stopped economic isolationists from claiming that free-trade agreements (FTAs) lead to trade deficits, which they say lead to job losses. Organized labor and their think tank allies have parroted this line in recent years with increasing frequency.

The problem is it just isn’t true.

U.S. Department of Commerce data show the United States has a trade surplus with its FTA partners. Don’t take my word for it. Look at the official trade data: I’ve provided a guided tour below.

Now comes the Big Lie. Some activist groups have fiddled with U.S. trade data in a way that contradicts the method used by the U.S. government and most governments around the world. The effect of this approach is to inflate the U.S. trade deficit.

These claims also cherry-pick measurements across different timeframes for our 20 FTA partners, again distorting the data.

Here’s the heart of the matter. The activists have subtracted from U.S. exports the value of goods imported into the United States that are subsequently re-exported without change. But as every high school algebra student knows, if you make an adjustment to one side of an equation, you have to take it into account on the other side. If you fail to do this, you’ll flunk the exam.

In a Shop Floor post, Linda Dempsey of the National Association of Manufacturers explains what the activists do next:

The pesky facts get in the way as they fail to make the corresponding adjustment to the import side, which includes those same “re-exports” as imports for consumption.

In this way, [they] distort the size of imports by statistically pretending that the “re-exports” they are taking out of one side of the equation should still be counted as imports into the United States on the other side of the equation.

To avoid this data distortion, the Commerce Department calculates trade deficits and surpluses on the basis of total exports and total imports, as does the NAM. Re-exports effectively cancel themselves out on both the export and the import side, producing the most accurate data available.

It bears repeating that an obsession with the trade balance is unhealthy. The trade balance tends to shift with relative rates of economic growth — toward deficit when growth accelerates and toward surplus when growth slows or recession strikes.

But when economic isolationists aren’t even getting their figures right, they deserve to be called out. It’s human to listen to both “sides” in an argument (see this recent Washington Post article on “Why we pretend all opinions are equal”), but sometimes one “side” happens to have the facts right.

Members of Congress and media representatives need to recognize that it is incorrect to say that the United States has a trade deficit with our FTA partners. It’s a lie to “adjust” U.S. trade data in the one-handed manner of these activists. They know what they’ve done is misleading — they just don’t care.

Guided Tour: How to Find the Data Yourself

We’ll look at 2013 as 2014 services trade data won’t be available until the fall of 2015.

Let’s start with manufactured goods. Check out the lower left quadrant of page two of this two-page PDF, which the Commerce Department updates regularly. The U.S. trade surplus in manufactured goods with our FTA partners reached $61 billion in 2013.

You can retrieve these same data from the Commerce Department’s Trade Stats Express. Go to National Trade Data … Product Profiles of U.S. Merchandise Trade with a Selected Market … click on Trading and Economic Regions and select FTA countries … select Balance … and for “item” select “NAICs” and click on “MANUFACTURES.”

Result: The United States has had a trade surplus in manufactured goods with its FTA partners for each of the past seven years.

Go back to the handy PDF. The first page shows that, despite the U.S. trade surplus in manufactures with our FTA partners, we have an overall merchandise trade deficit with these countries. In 2013, this deficit was $67 billion (first page, lower left quadrant).

The lion’s share of the difference between this manufacturing surplus and overall merchandise deficit is our sizable net imports of petroleum from our FTA partners. This trade in energy products is fundamentally unaffected by any trade agreement — it has more to do with geology. Nor does it make any sense to blame our petroleum trade deficit for job losses in any other sector.

Agricultural products are included in merchandise trade statistics.

Now let’s turn to services. The Commerce Department’s Bureau of Economic Analysis has a website that allows you to download spreadsheets on services trade with many but not all countries. It provides these data for the seven largest U.S. FTA partners: Australia, Canada, Chile, Israel, Mexico, Singapore and South Korea.

To retrieve these data, click on Int’l Transactions, Services and IIP … Begin Using the Data … International Services … and Table 2.2. (You’ll have to subtract imports from exports to get the balance.)

It turns out the United States has a trade surplus in services with six of these seven countries. The exception is a small deficit with Israel: Interestingly, the 30-year old U.S. FTA with Israel has no provisions on trade in services. In 2013, the U.S. trade surplus with these countries, as a group, topped $75 billion.

Services trade with the other FTA partners is relatively limited, but if the data were available they would likely show more surpluses, in keeping with the $200 billion U.S. services trade surplus.

The overall trade balance takes account of both merchandise trade and services trade, and for our FTA partners, the balance was positive in 2012 and 2013. In 2013, it was $8 billion. When service trade data for 2014 become available in the fall of 2015, they will almost certainly also show a surplus.

About the Author

About the Author

Senior Vice President for International Policy

Murphy directs the U.S. Chamber’s advocacy relating to international trade and investment policy.