Free Trade

The Treasury Department Is Entrenching Trump's Nonsense View of Trade Deficits

In a new report, the Treasury Department declares it will begin scrutinizing any nation that runs a bilateral trade imbalance of more than $40 billion with the United States

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President Donald Trump's basic misunderstanding of America's trade deficits will continue to haunt American taxpayers after he leaves office thanks to changes made this year to a little-noticed Treasury Department report.

The Treasury Department's annual report to Congress on "Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States" is supposed to alert elected officials to currency manipulation conducted by governments in places where American companies do a lot of business, but as this year's report notes, "there has been a decline in the scale and persistence" of that sort of behavior.

The Trump administration, however, has found a new way to make the study relevant. "Starting with this report," the Treasury says it will expand its investigations "to monitor for external imbalances" in trade. Specifically, the report will scrutinize any U.S. trading partner that runs an annual trade imbalance with the United States of more than $40 billion—a list that includes not only China but also key allies like Japan, South Korea, Germany, Italy, and Ireland.

There's nothing inherently wrong with the Treasury Department rounding up a list of America's trading partners and noting which ones run a goods surplus of more than $40 billion, of course. But the language suggests data-gathering is not the endgame.

"The Treasury Department is working vigorously to achieve stronger growth and to ensure that trade expands in a way that helps U.S. workers and firms and protects them from unfair foreign trade practices," Treasury Secretary Steven T. Mnuchin said in a statement accompanying the release of the report late last month. The report itself echoes that economic nationalism. "Treasury will continue to press major U.S. trading partners that have maintained large and persistent external surpluses to support stronger and more balanced global growth…while durably avoiding foreign exchange and trade policies that facilitate unfair competitive advantage," reads part of the executive summary.

And the real problem here is that it's all based on Trump's faulty conviction that trade deficits matter—when they really don't.

"By this document the Treasury is institutionalizing nuttiness," writes John Cochrane, an economist and Senior Fellow of the Hoover Institution at Stanford University.

To understand why trade deficits don't matter, Cochrane outlines a simple exercise. Imagine three nations trading with one another—Australia, China, and the United States. America buys $1 million in shoes from China, Australia buys $1 million in airplanes from America, and China buys $1 million in coal from Australia. All three nations are now running $1 million bilateral trade deficits with one of their partners, but all three are better off. "Bilateral trade 'deficits' are meaningless," Cochrane writes. "In quotes as this is a horrible word too, implying something is deficient every time you go to the Starbucks and suffer a coffee trade 'deficit.'"

Don Boudreaux, an economist at the Mercatus Center at George Mason University, says the report's focus on bilateral trade deficits is "completely untethered to economic reality." In an interview this week with Reason, he compared the Treasury Department's scrutiny of bilateral trade deficits to astrophysicists giving serious consideration to a geocentric model of the solar system.

But such is the gravitational pull of Trump-style economic nationalism, which posits that trade deficits are proof other countries are taking advantage of the United States.

Peter Navarro, Trump's top trade advisor, argued in a recent Wall Street Journal op-ed that lowering America's trade deficit would boost growth. In fact, no such correlation seems to exist for other countries around the world. As I've previously written:

In 2017, for example, the United States recorded GDP growth of 2.22 percent and ran a trade deficit of about $502 billion. But look at other countries that had similar growth rates. France grew at 2.16 percent but had a trade deficit of $18 billion. Germany grew at 2.16 percent too, but ran a trade surplus of $274 billion.

The same is true at the higher end of the growth scale. Ireland grew by 7.22 percent and had a $101 billion trade surplus in 2017; India grew by 7.17 percent with a $72 billion trade deficit. It's also true at the bottom. Italy's economy grew by a mere 1.57 percent with a $60 billion trade surplus; the United Kingdom grew by 1.82 percent despite a $29 billion trade deficit.

But maybe the best evidence of faultiness of the Trump administration's view of trade deficits comes from the very Treasury Department report that's meant to bolster the Trump administration's worldview.

On the first page, the report highlights how the United States' trade deficit with China grew to a record high of $419 billion in 2018. "A key driver of this increase was a sharp decline in U.S. exports to China in the fourth quarter of 2018, a time when U.S. imports from China were sustained," the report says.

The fourth quarter of 2018, of course, is the first full quarter after Trump imposed two rounds of tariffs on Chinese imports—the first in July and the second, larger set in August—with the expressed intent of reducing America's trade deficit. The opposite occurred.

As developments in the trade war go, this is not an earth-shattering one. But it's a good example of how the Trump presidency is institutionalizing a worldview that's at odds with free trade. Like how civil liberties violations under George W. Bush paved the way for worse ones under Barack Obama, this is exactly how new ideas worm their way into the executive branch's ongoing perception of its role in the economy and the world at large. Presidential administrations don't end when the guy in charge exits the White House for the last time.

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  1. Very Nice Article Very Good Job

  2. That’s right, bake that batshittery right into the system, you ^%$#@@@ Trumpalos.

  3. President Donald Trump’s basic misunderstanding of America’s trade deficits will continue to haunt American taxpayers after he leaves office thanks to changes made this year to a little-noticed Treasury Department report”

    Behind all of this seems to be an elitist view that the Treasury Department should inflict whatever policy is best on the American people–regardless of whom the American people elect as president or what they want. Populism is a reaction to precisely this sort of elitism, so if you want a populist president in power for the foreseeable future, be sure to keep promoting those elitist views.

    “Populism refers to a range of political stances that emphasise the idea of “the people” and often juxtapose this group against “the elite”.

    https://en.wikipedia.org/wiki/Populism

    I suspect Boehm finds it strange that Congress should reject good treaties, support bad wars, or impose bad immigration policies–just because that’s what the American people want and the policies their elected leaders represent. Unfortunately for Boehm, I guess, libertarianism is incompatible with elitism.

    The idea that people should be free to make choices for themselves includes the freedom to make bad choices, and the only libertarian means to achieve influence and power is through persuasion. If you’re incapable of persuading people to want libertarianism and, therefore, to desire libertarian and capitalist policies, then the solution is not elitism. Maybe, instead, you should get out of the way of those of us who can be persuasive to average people.

    Hint: Telling average people that who they vote for and what they want should be ignored by unaccountable elitists at the Treasury Department is not a good way to persuade them that they should want to be free to make choices for themselves, which is what libertarian capitalism and free trade are all about.

    1. > so if you want a populist president in power for the foreseeable future, be sure to keep promoting those elitist views.

      That Americans pay for the tariffs is not an elitist view, it’s a realistic view of the reality. That a trade deficit does not mean the US is losing money on a deal is not an elitist view, it’s a realistic view of reality. Like Socialism, Protectionism has been consigned to the dustbin of history, but like Socialism it keeps coming back like a zombie because otherwise intelligent people sometimes believe in the most ridiculous things.

      1. Funny how protectionism features strongly in socialism but somehow it’s now okay as long as it’s served as a side dish with nationalism. Patriotic socialism is the flavor of the day for many in this country, it seems.

        1. You know else was a fan of “Patriotic” socialism?

  4. American taxpayers are continually haunted by past Presidential and Congressional basic misunderstandings.

  5. Trumpists don’t care how much logic you use, because Trumpists are not about logic. They’re a cult of the personality, and nothing the Great Orange Man says is wrong.

    Great Orange Man says China pays for tariffs, the China pays for tariffs. Great Orange Man tells tide not to come in, then tide not come in.

    1. Most the “cults” around presidents, in my lifetime, have been for Democrats: FDR, JFK, Clintons, Obama. Reagan had a cult, too, as does Trump. Other presidents certainly had partisans but no where near defending every last jot and tittle of their administration.

    2. Essentially.

      That said, this will be reversed as soon as we elect someone who isn’t a complete moron to office.

  6. Like how civil liberties violations under George W. Bush paved the way for worse ones under Barack Obama, this is exactly how new ideas worm their way into the executive branch’s ongoing perception of its role in the economy and the world at large.

    In re the executive branch’s perception of its role in the economy, it’s not a worm, it’s an anaconda. It started way before Trump took office.

  7. Come on, regular people know that trade is something to “win”. You know, like a football game, or a marriage.

  8. When an economist tries to justify trade deficits with an example like “when you buy a coffee at Starsucks…”, I fart in my pants. And to think that some students pay $ 30,000 tuition/year to this institution of high learning. And that is because if you have a trade deficit with Starsucks, you’d better have a trade surplus with your boss (the boss could also be yourself). Otherwise, you’ll quickly run into problems. See, in general, in the long run, trade deficits must be balanced with trade surplus, be them the result of the trade of goods or the trade of services. You can’t escape that. But the trade balance is only a small part of the issue. The biggest part is societal. We should advise this “professor” to walk alone in certain parts of Detroit, and many other cities in this country. And I don’t even start with the fact that our meek politicians accepted to trade with countries that put tariffs on our goods whilst we let theirs enter free of tariffs. A sucker was born every minute in the US. Hopefully, this will stop. MAGA.

  9. ” But it’s a good example of how the Trump presidency is institutionalizing a worldview that’s at odds with free trade.”

    At Reason, free trade is when Emperor Xi’s goods *are not* taxed in America, while domestic labor to produce similar goods *are* taxed by payroll and income taxes.

    Why should domestic *labor* be taxed when purchased, but not foreign goods?

    If we followed Adam Smith’s logic, tariffs would be a lot higher than they are today.

    Adam Smith on tariffs to offset local taxes on production:

    “It will generally be advantageous to lay some burden upon foreign industry for the encouragement of domestic industry, when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former. This would not give the monopoly of the borne market to domestic industry, nor turn towards a particular employment a greater share of the stock and labour of the country, than what would naturally go to it. It would only hinder any part of what would naturally go to it from being turned away by the tax into a less natural direction, and would leave the competition between foreign and domestic industry, after the tax, as nearly as possible upon the same footing as before it.”

  10. […] Eric Boehm is understandably dismayed by the unalloyed economic illiteracy displayed by the U.S. Tre…. […]

  11. How can you idiots not understand basic capital flows? If the USA had 100 billion more in exports, or indeed 100 billion fewer imports that we produced domestically, we would have been wealthier than we were… In other words our growth would have been HIGHER.

    One of the reasons we don’t see 3%+ sustained growth anymore is because there is only so much growth to be had in the industries where we are competitive, and by running in the hole and having lack luster labor force participation rates, we’re not eeking out that extra bit of income/growth we would have with more balanced trade.

    It’s like saying that somebody who makes $100K a year, and is able to save/invest 2% of their income is doing fine, so why worry? Technically they’re not BK or anything… But to say that it wouldn’t be better for them, financially speaking in the long term, to be spending less and saving more… It just doesn’t compute.

    Our economy isn’t outright shrinking because the deficit is so big… But it is many millions of jobs smaller than it could be with more domestic production. That’s the whole thing in a nut shell.

  12. […] Not all the Democratic presidential candidates share that view, thankfully. In last week’s debate, Andrew Yang and Pete Buttigieg made strong, if brief, attacks on Trump’s tariffs. “Manufacturers, and especially soy farmers, are hurting. Tariffs are taxes,” Buttigieg said before turning to attack what he said was Trump’s overblown concern with trade deficits. […]

  13. […] Not all the Democratic presidential candidates share that view, thankfully. In last week’s debate, Andrew Yang and Pete Buttigieg made strong, if brief, attacks on Trump’s tariffs. “Manufacturers, and especially soy farmers, are hurting. Tariffs are taxes,” Buttigieg said before turning to attack what he said was Trump’s overblown concern with trade deficits. […]

  14. […] Not all the Democratic presidential candidates share that view, thankfully. In last week’s debate, Andrew Yang and Pete Buttigieg made strong, if brief, attacks on Trump’s tariffs. “Manufacturers, and especially soy farmers, are hurting. Tariffs are taxes,” Buttigieg said before turning to attack what he said was Trump’s overblown concern with trade deficits. […]

  15. […] Not all the Democratic presidential candidates share that view, thankfully. In last week’s debate, Andrew Yang and Pete Buttigieg made strong, if brief, attacks on Trump’s tariffs. “Manufacturers, and especially soy farmers, are hurting. Tariffs are taxes,” Buttigieg said before turning to attack what he said was Trump’s overblown concern with trade deficits. […]

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