Yesterday, we demonstrated why a focus on bilateral trade deficits will provide misguided (at best) or counterproductive and harmful (at worst) lessons to policymakers. In short, companies contribute to bilateral trade deficits with some countries and bilateral surpluses with other – but a report on bilateral deficits will almost never capture those surpluses. It’s even more complex than that – anyone who says the global trade is simple is tricking you or themselves – and today we’ll use the example of Xpres LLC in Winston-Salem, North Carolina (who we wrote about a few weeks back).

To recap our original post: Xpres imports blank ceramic mugs (e.g., coffee mugs) from Thailand under GSP. Mugs are then customized at its North Carolina headquarters and sold throughout the United States and exported to the United Kingdom. Xpres competes primarily against finished mugs (i.e., they require no further customization) imported from China. Refunds and lower tariffs associated with GSP renewal in 2015 have allowed Xpres to invest in its N.C. facility and hire 17 new workers – or about 60 percent employment growth – over the course of a year and a half.

Back to the misguided focus on bilateral trade deficits: what if the United States decided it must cut the trade deficit with Thailand? Furthermore, what if it decided that banning coffee mug imports was the best policy to achieve that goal? What sort of unintended consequences might play out and would anyone be happy with the results?

Banning coffee mug imports from Thailand presumably would shrink the bilateral deficit, but at what cost? It would likely increase the trade deficit with China as more finished mugs are imported instead, and shrink the trade surplus with the UK as Xpres no longer has products to export there. Much more importantly, such a policy would pose real risks to the North Carolina jobs that depend on customizing and selling those Thai mugs.

In a vacuum, it’s easy to see how policies to shrink bilateral trade deficits could be viewed positively. Yet even successful efforts to reduce bilateral deficits may have no effect on overall trade balances. And as the Xpres example clearly shows, pursuing such policies puts American jobs at risk.

In March, President Trump signed an Executive Order (EO) calling for a report on the causes of “Significant Trade Deficits.” Economists generally agree that macroeconomic factors related to national savings and investment rates drive trade balances, and we subscribe to that view as well. The EO and forthcoming report ensures that much ink will be spilled on both the causes of trade deficits and whether or not those deficits matter. Instead of rehashing the arguments that others likely will make, we want to drive home one key point:

The report’s focus on bilateral trade deficits will provide misguided (at best) or counterproductive and harmful (at worst) lessons to policymakers.

Is that based on theory? No. On ideology? Nope. Then what? Actual import and export patterns provided by companies while signing up for the GSP Supporter List. Specifically, we looked at companies sourcing from three countries named in the Commerce Department’s request for comments (India, Indonesia, and Thailand) and found that many export goods (or derivative products) from the United States to third countries, but almost none export back to the GSP supplier country.

In short, companies contribute to bilateral trade deficits with some countries and bilateral surpluses with other – but a report on bilateral deficits will almost never capture those surpluses.

Take India. More than 60 companies on the GSP Supporter List report importing under GSP from India in 2016. Of those, nearly half (29) reported exporting those same goods or products made from them. Yet just one company reported exporting back to India. The rest export to third-countries and have a positive effect on those other bilateral U.S. trade balances.

Based on the Supporter List sign-up data as well as U.S. trade data, GSP imports from India by Supporter List companies helped:

• boost U.S. trade surpluses in goods with Argentina, Australia, the Bahamas, Belgium, Bermuda, Brazil, Cuba, Dominican Republic, El Salvador, Guyana, Haiti, Hong Kong, Jamaica, Peru, Saudi Arabia, Singapore, United Arab Emirates, and the United Kingdom, and
• reduce the trade deficits in goods with Canada, China, France, Germany, Italy, Japan, Malaysia, Mexico, New Zealand, Sri Lanka, Sweden, Trinidad, and Vietnam.

The story is similar for companies importing under GSP from Indonesia and Thailand, and therein lies the risk of policy recommendations based on bilateral trade deficits. Any import-reducing steps taken to address the trade deficit with India could negatively impact trade balances with other countries.

Increasing the U.S. trade deficit with China – or reducing the surplus with Australia – certainly is not the goal of the Executive Order, but it may well be the result if too much stock is placed on bilateral trade flows.