As recently as 2009, nearly half the U.S. trade deficit was driven by one product: petroleum. If ever a national strategy could be devised to tackle the trade gap by targeting an individual product or individual set of countries, American dependence on foreign oil was on its face the place to look.
The U.S. did, in fact, conquer its oil deficit and a trade deficit with the oil-producing nations of the Organization of the Petroleum Exporting Countries.
Instead of getting smaller, however, the U.S. trade gap widened.
The oil experience is evidence that you can’t shrink a national trade deficit by targeting one product or one country or set of countries. It also provides clues about what might happen next as the Trump administration tries to close the U.S. deficit with tariffs on steel, aluminum and a range of goods from China.
In the mid-2000s, the U.S. imported more than 10 million barrels of oil a day. Production in America’s own oil fields was half that, and in a 30-year decline.
The ingenuity of engineers in the shale formations of North Dakota and West Texas led to a black-gold rush on par with the greatest oil booms in history. From mid-2011 to mid-2015, U.S. oil production climbed 78%, easily eclipsing the volume of imports. To put that in perspective, the previous oil boom in Texas and Oklahoma in the late 1970s increased oil production just 7%.
American output flooded the global oil market, sending oil prices down. In late 2015, Congress even lifted a 40-year ban on oil exports. By November 2017, U.S. production climbed above 10 million barrels of oil a day, the most in nearly half a century.
But in the same decade that America tackled oil, the deficit outside of petroleum exploded. The overall trade gap, though narrower than it was in the mid-2000s, has been widening in recent years even though one of its biggest sources has effectively disappeared.
“The trade deficit doesn’t come from the fact that we’re importing this good or that good,” said James Hamilton, an economist at the University of California, San Diego, and a leading expert on the economics of oil. “The trade balance is primarily determined by the overall spending on goods and services by U.S. residents and firms, compared to production. If spending is more than production, we’ve got to import.”
Oil production went up during the boom, but domestic spending across the broad economy went up even more.
Trade balances writ large are a function of how much Americans invest and save. When domestic saving isn’t enough to cover investment, the balance is made up from abroad. Low saving leads to wider trade deficits. Conversely, high-saving countries, such as Germany and China, run surpluses that fund the consumption and investment of others.
One major reason the U.S. didn’t shrink its trade deficit was simultaneous fiscal deficits.
When government borrowing rises, it needs money from somewhere. Consumers could dramatically ramp up their saving and purchase Treasurys—which would dent consumption—but in practice did not. That leaves foreign nations with financial surpluses as the biggest source of funds buying up U.S. debt—nations that save a lot and export more than they import.
“It’s a contradiction in terms of policies to say we want to borrow a lot for fiscal operations but don’t want to borrow from other countries, which is what the trade deficit amounts to,” Mr. Hamilton said.
Large tax cuts and spending increases enacted by Congress and the Trump administration are poised to push fiscal deficits above $1 trillion in coming years. That implies trade deficits will grow.
Mr. Trump’s tariffs aren’t focused just on the trade deficit. He says he’s pushing for trade fairness—the same treatment for U.S. firms and business abroad that foreign firms get in the U.S. Reciprocity is one of his watchwords.
Still, many economists disagree with the idea that the trade deficit needs to be addressed at all. Rich economies with deficits have grown somewhat faster than surplus countries over the past decade, notes Megan Greene, the chief economist at Manulife and John Hancock Asset Management.
When the U.S. trade deficit shrinks, it is often during economic downturns, when American consumers spend less and try saving more. Imports slump in these periods. The deficit in goods and services nearly halved during recession in 2009, going from $709 billion to $384 billion. That accounted for all of the improvement the U.S. has seen in the deficit in the past decade.
“If the U.S. really needs to address the deficit,” said Ms. Greene, “it needs to look in the mirror and ask what about its own investment and savings it can change.”
Michael Feroli, chief U.S. economist of JPMorgan Chase & Co., has dubbed this the “square peg and round hole of fiscal and trade policies”—it’s nearly impossible for a nation to close its trade deficit while widening its fiscal deficit and expecting consumers to keep spending.
Ultimately, “fiscal policy will dominate trade policy,” Mr. Feroli said. “Tariffs and other trade restrictions will be insufficient to lean against the overwhelming force.”
