President Trump’s trade policy is terribly misunderstood and the subject of much demagoguery from critics and supporters alike.
Critics say his focus on the trade deficit is misguided. Americans don’t save enough to finance domestic investments — new machines and software to expand businesses, and new homes — and government deficits. Consequently, we borrow from foreigners by selling treasuries, other securities and real estate to make up the difference.
Put differently, private individuals, businesses and the government spend more on goods and services than the nation produces. The trade deficit makes up the difference and is paid for by borrowing from foreigners and selling assets.
If we saved more or if the federal government spent less, we would not need that foreign capital. Hence, if the trade deficit is a problem, Americans created it by spending too much.
The recent tax cut surely drove up the budget deficit and will require more foreign borrowing and bigger trade deficits.
Treasury Secretary Steven Mnuchin did Americans a disservice asserting that the recent tax cuts would increase growth and tax revenues enough to pay for lower tax rates.
No fiscal stimulus — neither President Obama’s massive spending nor Mr. Trump’s even bigger tax cuts — ever created that kind of jolt to growth. I seriously doubt any economist can show me an example, beyond perhaps one focused on developing a significantly underemployed resource like oil or an authoritarian government forcing the unemployed into public works.
That’s why the federal deficit was about $780 billion in fiscal 2018 and will likely exceed $1 trillion in 2019. The deficit has never been as large a share of gross domestic product other than when the economy was in a recession or the country at war.
If we used most of the nearly $600 billion we borrow annually from foreigners to create new businesses, it might be useful. Instead, we are using it to live beyond our means, and what we owe foreigners will soon reach levels that caused economies like Spain to collapse. Sooner or later, as the trade deficits get bigger and bigger, doubt sinks in about the ability to pay and creditors pull the plug.
In all this, economists are relying on basic accounting identities — the domestic savings deficit must equal foreign capital inflows must equal the trade deficit.
What they purposefully omit is that causality can run in the opposite direction — that’s malpractice.
If the federal government freed up constraints on domestic energy development — eliminated regulatory obstacles to pipeline construction and offshore drilling — oil production would rise, net imports of energy and the trade deficit would fall, GDP and tax revenues would increase and the government budget deficit would fall.
Similarly, were Mr. Trump’s tariffs successful at opening up the Chinese market to more U.S. products, the trade deficit would go down. The jolt to domestic demand would boost U.S. GDP and tax revenues, and the budget deficit would fall.
However, proponents of a muscular trade policy, like Peter Navarro, do the nation a disservice by claiming trade wars are easy to win — especially when they advocate slapping tariffs on our allies instead of just China and a few others.
When the U.S. economy was nearly half the global pie, we might have been able to dictate terms, but these days it is about one-sixth, and other players can simply retaliate and go around us. Witness the Trans Pacific Partnership, or TPP, moving ahead without us, and the EU and Japan negotiating a rather comprehensive free trade pact that includes concessions on product standards President Obama could not obtain in his failed trans-Atlantic negotiations.2 comments on this story
Mercantilism is so much a part of the fabric of the other three big economies — Germany, China and Japan — it is going to take more than some tariffs to move them to reform. Instead, they will just play with each other.
If Mr. Trump’s objective is to ultimately force our trading partners into genuine free trade, Mr. Navarro may be more genius than he realizes. He is inspiring free trade among the other players that sadly locks us out.
In the meantime, watch the prices of soybeans and corn and the profits at GM — GDP growth will slow next year if Mr. Trump fails to reach some kind of accommodation with the TPP and EU.
Trade wars are easy to win — for the other guy.