President Trump said at a fundraiser on Wednesday that in a meeting with Canadian Prime Minister Justin Trudeau, the young Liberal Party leader had pointed out that the U.S. has a surplus in bilateral trade.
“I said, ‘Wrong, Justin!’” Trump told his audience. He even sent a staffer to check the number.
But Trudeau was right, not Trump. Trump’s aide neglected to check both goods and services. When these are tallied up, the U.S. had a $12.5 billion trade surplus with Canada in 2016.
Ideally, a story like this one would alert Trump that what he doesn’t know about trade is substantial. It’s an important body of information, too, that he should try to learn more about.
Trump’s protectionist sympathies are widely shared, but being fairly common doesn’t make them right. The president owes it to all of us to put America first, rather than his instincts, and fully inform himself about what he is doing and about how America’s foreign trade works. We hope sincerely that the appointment of Larry Kudlow as his economic adviser will bend this learning curve in the right direction. As a President Ronald Reagan and Wall Street alumnus who has always favored free trade, Kudlow can try to explain away Trump’s worst misconceptions.
The president should understand, for example, that a trade deficit does not mean that the U.S. is “losing” money to other countries, the way he repeatedly implies and explicitly said in his conversation about Canada this week. A trade deficit does not weaken a nation’s economy any more than a trade surplus strengthens it. It is indeed often a token of a strong economy.
If Trump understood the economics of trade, he would quit with the focus on eliminating trade deficits. That’s because the only way of doing so is by triggering a recession.
It is impossible to engineer a trade surplus by manipulating trade policy. If the plan is to subsidize exports, hinder imports, or both, either gimmick will just cause the value of the dollar to rise until it depresses foreign demand for U.S. goods and services. That will in turn increase Americans’ demand for foreign goods and services, causing imports to increase and exports to decrease, and in the end defeat the entire exercise.
Just in case you feel tempted to try another method, such as devaluing the nation’s currency in order to increase exports and discourage imports, that won’t work either. The resulting inflation will soon enough increase the price of production and cancel whatever benefits you were otherwise expecting from increased exports.
In this, as in so many other matters, the free lunch proves illusory.
Trump’s main preoccupation when it comes to trade, even more than the North American Free Trade Agreement, has been the large trade deficit with China and a perceived need to head off the specter of Chinese global dominance through mercantilism.
Perhaps there is a national security argument tied into Chinese political influence. Or maybe that’s just another excuse. But at least with respect to the economic considerations, China’s near future as a gigantic, affluent market for American exports is a vastly underrated topic that helps put the trade deficit into perspective.
Thanks to the Chinese government’s abandonment of socialism, the wealth of the average Chinese consumer has skyrocketed. So has his ability to afford American products.
Since the turn of the century, roughly 500 million Chinese have risen above the international poverty line of $1.90 in income per day. The same number has risen from below to above $5.50 per day.
This helps explain how exports of U.S. goods to China increased eightfold between 2000 and 2017, much faster than the rate at which imports increased. This is likely to continue. Trade with China is not just about cheap consumer products, but also a bet on future exports, based on the rapidly growing wealth of 1.4 billion Chinese.
These and many other ideas are out there, waiting for Trump to discover them. We hope Kudlow is able to bend his ear and introduce him to a whole new set of ideas, so that next time he’s in a conversation about trade, he doesn’t have to make anything up.
