Wednesday, April 11, 2018

How Trump Misunderstands Trade

By Veronique de Rugy

President Trump recently tweeted, referring to the United States trade deficit with China, “When you’re already $500 billion down, you can’t lose!”

In 1776, Adam Smith observed that nothing “can be more absurd than this whole doctrine of the balance of trade.” Sadly, almost 250 years later, the president — along with his economic adviser Peter Navarro and Commerce Secretary Wilbur Ross — has elevated this economic fallacy into a pretext for protectionism.

Fueling this bipartisan hysteria is the widespread failure to understand that United States trade deficits generally add capital to our economy — more factories, more R & D or more machines.

Further confusing the American people,
the power held by those advisers means that we hear them on television daily repeating, contrary to almost every reputable economist, their mistaken belief that our $800 billion trade deficit — including a $375 billion goods deficit with China — reduces our gross domestic product and is evidence of foreign-government chicanery.

The notion that trade deficits are always bad for the economy is based on several fundamental mistakes. The first mistake is the assumption that trade is a zero-sum game, suggesting that the country selling products abroad is a winner while the one who buys is a loser. That’s simply wrong.

Think about your own experience. Without ever worrying about it, we run up trade deficits on a daily basis with many merchants. When you shop at the grocery store, enjoy a drink at your favorite bar or get your hair cut, you run up a personal trade deficit with your grocer, bar and hair stylist. Do they ever buy anything from you in return? When you get paid by your employer, he runs up his trade deficit with you. Do you buy as much from your employer as he buys from you?

These examples illustrate how trade deficits with other economic entities are almost always nothing to fret about.

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