For years, the statistic trumpeted by the news media and politicians as proof that the United States trails behind many industrialized nations in Asia and Europe has been the trade deficit, which currently stands at some $502 billion overall, with China accounting for some $347 billion of that and Mexico accounting for $63.2 billion (a five-year high as of 2016).
Now, the administration of President Donald Trump may be about to adjust how the government arrives at those figures in an action that could increase the chances of a trade war being waged by at least some of the nations that do business with the U.S.
This is because if the White House gets its way, the trade deficit numbers that are reported by the Census Bureau could actually increase, making the gap between what the U.S. imports and what it exports appear to be larger than what it is currently.
Specifically, the White House might ask the Census Bureau not to include in its calculations of exports items that are first imported into the U.S. and subsequently exported — for instance, cars that are manufactured in Mexico for an American car company, imported into the U.S. and then shipped off to a third country — say, Canada — to be sold.
This would have the effect of lowering reported export numbers and bolstering arguments that existing trade agreements need to be renegotiated more in the U.S.’s favor. Particularly under fire would be existing “free-trade” treaties (such as NAFTA) which in some cases currently show a trade surplus in favor of the U.S., but under the new methodology could show a trade deficit instead.
In fact, NAFTA partners Canada and Mexico would likely be the nations most affected by the methodology change as they’re currently the two top destinations for American “re-exports.” And of those two, numbers for U.S.-Mexican trade especially would be affected by the update, as the re-export value to Mexico in 2016 was close to $55 billion.
Even though this potential recalculation is reportedly only in the discussion stages at the White House, career employees in the United States Trade Representative’s (USTR) office have made it clear they object to the formulation change, even though they recently complied with producing test data based on the new formula. These same employees insisted on including their own views about the change in reports being prepared for Congress.
For its part, the Trump administration said it’s considering a multitude of options regarding the methodology change. One possibility that may see the light of day is the new formula may only be applied when the case needs to be made for trade agreement renegotiation, as opposed to in regularly produced government numbers released by the Census Bureau.
Officials said that the administration hasn’t finalized on a direction. “We’re not even close to a decision on that yet,” stated Payne Griffin, deputy chief of staff at the USTR office.
“We had a meeting with the Commerce Department, and we said, ‘Would it be possible to collect those other statistics?'” At the Census Bureau (an agency of the Commerce Department), a spokesperson for the agency said they weren’t aware of any discussions about methodology changes.
Still, some financial analysts say the potential change could be beneficial because it would present a more accurate picture of actual American exports, rather than incorporating figures for items that merely get a sticker slapped on them in the United States before they’re shipped elsewhere.
For the Trump administration, which wants to focus on exactly how much is authentically being manufactured in the United States, versus what’s shipped in from abroad and then re-exported, this would be an important step.
At the same time, other observers say that to recalculate only one side of the equation — exports — without taking into account the other side — imports — misses the mark. “As a statistician, you generally want symmetry,” stated Steve Landefeld, former director of the U.S. Bureau of Economic Analysis.
“If you’re going to begin to exclude re-exports from the U.S. export figures, you probably for reasons of symmetry” would desire to adjust the import figures as well.
The Trump administration wouldn’t rule out switching the imports formula as well, potentially using a narrower way of measuring its values, referred to as “imports for consumption.” This would have the effect of reducing a portion of the differences produced by the re-exporting calculation change.
It should be noted that the Obama administration had previously resisted calls to change both calculations. But this was the same administration that promised to double U.S. exports within five years — in 2010. Fast forward seven years, and that promise hasn’t come close to being kept.
Regards,
Ethan Warrick
Editor
Wealth Authority
