Let’s back up and review what the Trump administration is really looking to accomplish. In 2017, the U.S. trade deficit for goods was $806.5 billion, up from $502.3 billion in 2016. As the charts below show, China has the largest trading surplus of any nation. President Trump has also made headlines criticizing the North American Free Trade Agreement (NAFTA), among others, with Mexico and Canada as being unfair. The trade deficit in goods with our two neighbors is much more modest and in more balance than with China, Japan or Germany.

Countries America Loves Trade With

However, while the trade deficit in goods alone is more sensational, it is not a complete picture. The world trades more than goods, we also trade services. Services include banking and insurance, travel, telephony, computer and information services, maintenance contracts, and other consulting, technical and trade related business services. These services include some of the largest sectors in our economy. When trade of services is combined with the trade of goods, the picture looks a little different:

Countries America Loves to Trade

Canada goes from an $18 billion deficit to a $2.8 billion surplus! Germany’s deficit grows by $3 billion. China’s deficit drops by $43 billion, but is still a massive $337 billion deficit which is 59.3% of our entire trade imbalance. Now quantified, may we agree the purpose of President Trump’s initiatives are worthy? The instrument being used, tariffs, is not.

What can work?

  1. A weaker U.S. Dollar (USD).

A large part of the deficit problem has been due to the appreciation of the USD. As the chart below shows, from May 2014 through March 2015, the USD appreciated over 27%.

US Dollar Index

Source: www.thechartstore.com

When the USD strengthens, it makes international goods and services cheaper for U.S. citizens and U.S. made goods and services more expensive for our trading partners. If the USD were to weaken, the costs of foreign goods would rise, and US producers and consumers would import less. Conversely, American goods and services would be less expensive and exports would increase. The net is that our trade deficit would decrease. We would not suggest an outright currency devaluation, especially given the USD’s status as the world’s reserve currency, but there are more subtle ways to “talk the dollar down”. Conversely, if the Chinese were to let the Yuan appreciate, which recently has been happening, their goods and services would become more expensive and ours would become less so. The net effect is that the trade deficit would shrink. To do this, both countries, and all our trading partners, need to work together.

  1. Increase savings, reduce consumption and live within our means.

Societally, if we consume less, then we will have less need to borrow from abroad. This concept applies to our governments (federal, state and municipal), our businesses and our consumers. Next year’s federal budget deficit is estimated to be ~$2 trillion. Much of this shortfall must be financed from abroad. Without discussing the merits, one way to “force” Americans to live within our means is to implement a consumption tax used by many nations today. By taxing Americans on what they actually use, we would be discouraging unnecessary consumption, encouraging savings and helping close our government’s massive budget deficit.

If we are truly serious about reducing our trade deficit, we are also going to have to be serious about closing our government’s budget imbalance. Put simply, as long as Americans consume more than we produce, our imports must exceed exports. Politicians are going to have to stop kicking the can down the road, blaming others for our excesses, and start making some tough choices for all of us. As citizens, we should heed the call to save 15% of our income each year. We all need to reverse our excessive consumerism and live within our means. Without meaning to sound melodramatic, our futures depend on it.

This article was contributed by David Haviland, managing partner and portfolio manager at Beaumont Capital Management, a participant in the ETF Strategist Channel.

For more insights like these, visit BCM’s blog at blog.investbcm.com


¹ http://tradepartnership.com/wp-content/uploads/2018/03/232EmploymentPolicyBrief.pdf

Copyright © 2018 Beaumont Financial Partners, LLC. All rights reserved.
The information presented in this report is based on data obtained from third party sources, with it and the referenced articles, is provided for informational purposes only. Although it is believed to be accurate, no representation or warranty is made as to its accuracy or completeness. The views and opinions expressed throughout this presentation are those of our Portfolio Manager as of 4/6/2018. The opinions and outlooks may change over time with changing market conditions or other relevant variables.

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