Treasury Secretary Steve Mnuchin has been able to announce a positive outcome in the China-U.S. trade spat. There will be no trade war, China will reduce the trade deficit by some unspecified value, and ain’t that great?
Well, no, not really. It’s going to make all of us a little poorer and no one better off — it’s not a notable victory for economic policy of any kind. Bilateral trade deficits have absolutely no economic significance at all.
Sure, they’ve got political importance. President Trump said he’d do something about trade with China, he’s done something and the large deficit number will, assuming it all goes through, get smaller. The economic effect is, however, mildly to all our disbenefit. So forget the politics here and look at the economics.
China has agreed that the country will purchase more American products. Leave aside the basic thought that countries don’t trade with each other, it is people within one place which trade with people from another. We’re going to have some severe application of governmental power to insist that Chinese people buy American rather than what they’re buying right now. But beyond that OK, so, more Chinese buy more American products. This makes little difference to either Chinese or American total trade numbers.
For example, the soy beans that would have been bought from Argentina will now be bought from the U.S. But those other people, perhaps Europeans, who would have bought the U.S. soy will now not be able to since it will be on a ship to China. Thus, they will buy the Argentine soy beans instead. We’ve not changed U.S. exports of soy beans one whit, we’ve just changed which part of the world they go to.
This is the problem with thinking that bilateral trade deficits matter. It simply doesn’t, in the slightest, make any difference how much we buy and or sell to and from China. By insisting that the two come more into balance, all we’ll do is unbalance some of our trade with the other 190 countries of the world. The total effect upon the U.S. trade position will be around and about zero.
Except that that nonzero effect will be detrimental. Without governments interfering in trade patterns quite obviously everyone will get what is the cheapest for them. Not just soy, but soy plus transport costs. The pre-intervention trade pattern of soy, in our example here from Argentina to China, is cheaper than the U.S. to China one — that’s why it was happening before the “trade deal.” So too with the U.S. to Europe. After the deal we have replaced those two most efficient sources and destinations with the less efficient pair. Costs have risen for all with no corresponding gain to anyone at all.
Everyone ends up with the same amount of soy, everyone has the same total trade balances, we’ve just wasted more money on doing it all.
Other than whatever effect this all had on Trump’s base, we’ve just rearranged the deck chairs on the anti-trade Titanic. There are mild to trivial effects on the economy, and those effects are detrimental.
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.
