US trade deficit vs unemployment rate: An inverse relationship

The US trade deficit with China is a major reason claimed by President Trump to justify tariffs on Chinese goods. “Losing on trade” is his rallying cry, and, it has never been louder.

The president, as well as many US lawmakers, has been citing America’s over 800 billion dollars global trade-in-goods deficit as a source of its domestic job losses. But is it true?

If America’s rising trade deficit is a source of severe job losses, then the country’s unemployment rate should soar given how much its trade deficit has risen. Let’s take a closer a look at the relationship between the US trade deficit and the US unemployment rate.

The US began to consistently run a trade deficit starting in 1971. From 1971 until just before the dot-com crash the US trade-in-goods deficit sky-rocketed a staggering 200-fold.

But opposite to what we expect, as the trade deficit soared, the US unemployment rate precipitously fell from a post-Great Depression high of 10.8 percent in 1982 to just 3.9 percent in 2000.

The US economy recovered and bounced back in the post-tech bubble years. Between 2001 to just before the global financial crisis, the spending power of Americans nearly doubled the country’s trade deficit.

But, the jobless rate fell from 5.7 percent in 2001 to 4.4 percent in 2006. A rise in the trade deficit actually coincides with a fall in the US unemployment rate. The numbers again disapprove President Trump's theory.

With the onset of the global financial crisis, US consumers severely pulled back. More cautious spending means fewer imports from abroad.

The US trade deficit naturally shrunk by 40 percent from 2006 to 2009, but this time, the unemployment rate soared from 4.4 percent to 9.9 percent. The inverse relationship between deficits and jobs rears its head once more.

As the world had recovered from the financial crisis by the end of 2017, the US trade deficit stood at near record highs, yet, its unemployment rate came in at a 17 year low.

There is a misconception among many in the United States that trade deficits are inherently “bad.” This perspective is one dimensional.

Rather, America’s trade deficit is a mirror image of what propels its economy: consumption. With consumption driving 70 percent of the US economy, a rising trade deficit reflects robust economic activity.

It means Americans have more to spend on goods from abroad. It’s also a proof of a more robust US labor market.

When President Trump uses the trade deficit to justify tariffs on foreign goods, the numbers simply don't add up.

The US should take a bigger-picture and a longer-term view towards its trade relationship with China. The economics of China’s population size, plus its rising spending power, are huge opportunities for global companies ready to prosper with China together.