Republican presidential candidate Donald Trump and Speaker Paul Ryan disagree on a number of issues. One of the most divisive of these is trade. Trump has misdiagnosed the situation, being guilty of the post hoc ergo propter hoc fallacy: If A comes before B, then A caused B. It is true that the North American Free Trade Agreement was followed by American jobs moving abroad.
NAFTA came into effect on Jan. 1, 1994. For that month the United States trade deficit was $6,207 million. By January 2016 it was $42,308 million, roughly seven times greater. But that does not mean that NAFTA was the cause and job loss the effect. Even with the most poorly negotiated trade deals, other things equal, exports equal imports, and there is no balance of trade deficit. But other things are not equal.
In 1994 the federal budget deficit was $276 billion; in 2015 it was $438 billion, an increase of $162 billion. Roughly one-third of that increase was financed by borrowing from abroad. It was that foreign borrowing that caused the trade deficit.
To buy U.S. bonds foreigners need the American currency. Their buying increases the value of the dollar, making American exports less competitive and imports more attractive, resulting in fewer jobs at home and more jobs abroad.
This argument can also be made in a slightly different way. When foreigners export goods to us they are paid for in a currency which can be used to buy our exports. But if some of the dollars they receive are used to buy U.S. government bonds, then they can only buy a smaller quantity of our exports. Imports exceed exports — we have a trade deficit.
Significantly in the presidential election of 2000, one of the few years in which the United States had a federal budget surplus, trade was much less of an issue than it is today.
Here is another reason for wishing Speaker Ryan success in reducing the federal budget deficit: The balance of trade deficit will decline as well.
Gordon Philpot is professor of Economics Emeritus at Whitman College. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
