It’s a little strange when President Trump declares that his own policy has been a failure by the very standards he himself is using. But then we all rather knew Trump didn’t quite understand trade in the first place. Just to remind you, the point of trade is that we get to consume things made by foreigners. Imports are the aim of the process, not some problem with it.
The basic contention of economists is that as long as we have a floating exchange rate, trade deficits don’t matter. If we buy more from the world than we sell to it, then all that happens is, on the other side of the balance of payments, foreigners must be investing more in America than we are outside. We’re also most insistent on that “must” there because the balance of payments does indeed balance, always.
Further, they insist that a bilateral trade balance doesn’t matter a damn. There are some 192 countries out there, and we’re just not going to have balanced trade with each and every one of them. My household accounts are roughly in balance, but my trade deficit with the supermarket is fierce; I give them much more money than they give me. Even if there were a problem with deficits, such as if we had a fixed exchange rate, as we did before 1973, then it would only be the overall balance that mattered.
Trump tells us differently and says that a trade deficit means we’re losing. Thus, he started this little trade war he’s having, on our dime, with China. As CNBC reports, “U.S. President Donald Trump said his tariffs on Chinese goods are causing companies to move production out of China to Vietnam and other countries in Asia.“
The problem with this statement is obvious. Trump’s telling us that importing more than we export, having that trade deficit, is a problem, one that we should have a trade war about. Then he tells us that the effect of the trade war isn’t to reduce the deficit at all. It’s just to change around those bilateral relationships, without moving the overall position. In which case, why are we bothering in the first place?
Those who really don’t understand trade — say, trade adviser Peter Navarro or U.S. Trade Representative Robert Lighthizer — make this even more explicit. The original claim is that us consuming more than we make is a problem. To solve this, we should supposedly be taxing ourselves more, as tariffs are taxes upon us, and making ourselves poorer in order to, well, what? Reduce how much we import? Or, as it is turning out, just import the same amount from different people? That second is worth it, is it?
Standard economics tells us not to worry about trade deficits or the balance of trade at all. Trump’s defense of his worrying and doing something about it is that he’s not changing that balance of trade at all.
Another way to make the same point is that cheap sneakers from Asia have killed off U.S. sneaker factories. Trump’s triumph is that the sneakers now come from Vietnam, not China. In what manner is this an improvement in anything at all for us here in the U.S.? Given which, why are we having a trade war?
Tim Worstall (@worstall) is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
