THE U.S. economy is in excellent shape, a disappointing February job growth report notwithstanding. The unemployment rate is only 3.8 percent; inflation is under control. Both real wages and productivity growth have recently improved. The number of people in the United States working in manufacturing is 12.8 million, up 1.4 million from its Great Recession low point.
Meanwhile, the United Statesí merchandise trade deficit hit $891 billion in 2018. Many greeted the news by noting that it was a defeat for President Trumpís policy of tariffs and threats of tariffs, and it certainly was. However, the coexistence of a huge trade deficit with robust job creation was more than a refutation of Mr. Trumpís policy in practice ó it debunked the theory behind it. There is simply no necessary connection between the size of the trade deficit and the general level of prosperity. In the context of relatively strong growth, it is no surprise that Americans would spend more disposable income on imports, thus swamping the impact of tariffs. Ironically, Mr. Trumpís massive tax cuts were part of the reason for this: A trade deficit is the necessary flip side of negative net national savings, for which todayís huge budget deficits are partly to blame.
Lesson: Large economic forces such as federal fiscal policy, currency fluctuations and the like have as much or more to do with annual trade deficits. That puts the current trade policy debate in proper perspective. The apparently impending deal between Mr. Trumpís negotiators and Chinaís reportedly features Chinese promises to buy more U.S. grain and natural gas, along with pledges of greater equality for U.S. businesses operating in China. It could help reduce but cannot seriously dent what is now a $419.2 billion merchandise trade deficit with that country.
A similar point applies to the U.S. trade deficit with Mexico, which also grew last year, and to the pending U.S.-Mexico-Canada Agreement (USMCA), Mr. Trumpís ballyhooed replacement for the North American Free Trade Agreement. The USMCA usefully cracks open Canadaís protected dairy market and updates digital trade rules, while adding some unnecessary and possibly counterproductive wage and North American content requirements for auto manufacturing in Mexico. Ratification is desirable not because the USMCA is a good deal but because the alternative ó Mr. Trumpís threatened pullout from NAFTA ó would be worse.
Yet the politics of the deal have changed since Nov. 30, when the three nationsí leaders signed the USMCA. The Democrats run the House of Representatives and are not eager to abet a Trump political win. They demand more changes to the trade deal as their price for Democratic votes. Meanwhile, both Canada and Mexico have announced their legislatures wonít ratify it unless Mr. Trump agrees to lift separate tariffs he imposed on their steel products.
With November 2020 just around the corner, Mr. Trumpís threat to blow up NAFTA looks more and more like a threat to blow up his own reelection ó i.e., a bluff. Cooler heads on Mr. Trumpís trade team, if any, should counsel patience. The safest thing the president can do for himself ó nothing ó would also minimize harm to the economy.