Donald Trump

Trump's Economic Strategy Is Bound to Fail

The more imports, the better.

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The U.S. trade deficit in goods and services increased to $54.9 billion in August, up from $54.0 billion in July. That's because imports grew more than exports overall. While President Donald Trump will see this higher trade deficit as a bad thing, we should not. It can be a bit confusing, but Trump and pretty much every president before him justified allowing imports as a price we must pay to allow American companies to sell their stuff abroad.

Consider former President Barack Obama. He once said during a State of the Union address, "Ninety-five percent of the world's customers live outside our borders, and we can't close ourselves off from those opportunities." This was meant to explain why it was OK for him to lower tariffs on American goods: It was the key to gaining more access to foreign markets for domestic exporters.

Every multinational or bilateral trade agreement is based on this idea—an idea that reached its zenith in the 17th century. The underlying belief is that the only benefit we receive by agreeing to accept more imports is that other governments will allow their citizens to buy more of our exports. Such thinking has made free trade agreements possible; these, in turn, have made trade significantly freer. But we should nevertheless abandon this backward thinking.

Let's consider some counterintuitive but true facts about imports:

In the long run, the level of exports is tied to the level of imports. The easiest (although not the only) way to think of this relationship is to recognize that the more a country imports, the more of its money its people spend (and send) abroad. With more of its money abroad, foreigners have more money with which to buy the home country's exports. This is a simplified rendition of what in economics is known as the Lerner Symmetry theorem. This theorem explains why when our imports grow, so do our exports (though export growth may not be as much as the growth in imports because foreigners can also spend their U.S. dollars by investing in the United States or buying our debt).

The Lerner Symmetry theorem also explains why, when the North American Free Trade Agreement went into effect in 1994, U.S. imports increased significantly afterward, as predicted, but so did U.S. exports. And it explains why most economists consider any attempts to affect the balance of trade through export subsidies to be foolish. Reality doesn't work this way. A better way to export more is to import more.

This economic understanding also means that the Trump strategy is bound to fail. Sure, with enough tariffs you can reduce imports from, say, China, on a bilateral basis. But you will also be reducing your exports. And in no case will any of these changes affect your global trade balance, but that's another column for another day.

One more reason why imports are so important is that they are tremendously beneficial to middle- and lower-income consumers. The more imports, the better, as these lead to greater consumer choices and varieties, all at lower prices.

Moreover, final consumers aren't the only ones to benefit from imports. U.S. manufacturers benefit from lower input prices. At least half of U.S. imports are not final consumer goods; they are, instead, inputs for U.S.-based producers, which help reduce imported-input costs. This reduces businesses' overall production costs, which promotes employment possibilities and economic growth. We should welcome U.S. business and employment growth.

But what about domestic businesses that have to compete with these imports? Well, what about them? All businesses have to compete for consumers' dollars. And in a country as large and economically dynamic as the United States, most competition comes not from imports but, instead, from other domestic producers. Just ask Blockbuster how it liked competing with Netflix.

The bottom line is that the U.S. businesses that lose customers because of imports are no more "victimized" or worthy of special consideration than are the far more numerous U.S. businesses who lose customers to other U.S. businesses.

Competition is an indispensable component of a healthy market economy, and we have every reason to welcome competition from abroad with all the sincere applause with which we welcome it from domestic firms and entrepreneurs. In that spirit, I welcome imports, and so should you.

COPYRIGHT 2019 CREATORS.COM

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  1. It’s not an economic strategy, it’s a national security strategy.

    It is intended to slap China into shape by hurting them more than it hurts us, until they cry Uncle. That includes nixing trade agreements like NAFTA that allow Chinese exporters to don a sombrero.

    Exporting tons of bombs to Germany and Japan in 1941-45 absolutely free of charge to the recipients and financed by the longsuffering American taxpayer, was shockingly bad economic policy. It was not intended as such.

    1. News flash, we’re not at war with China.
      If you think the US government should go to war with China, then get Congress to declare war on China. Otherwise, don’t use trade as a substitute for war.

      These trade restrictions are just another way that the state substitutes its moral judgment for that of each individual. If you don’t want to trade with China, then don’t. But don’t use the state to force me not to trade with China.

      1. you do a lot of whining and crying about our southern border that people can turn around and leave from but when it comes to China imprisoning and murdering Muslims you don’t seem to care all that much… odd

        1. Some of us desire a nation that keeps its dick in its pants, and doesn’t aspire to serve as World Cop. To these among us, we think that USA borders ARE a concern of the USA, but that affairs of other nations (inside the borders of those other nations) are the affairs of those nations. … We meddled in Iraq, for example. Results? The peoples of Iraq have suffered long and hard, under internal strife, to include suicide bombings. They are arguably worse off than they were under Saddam. The sad truth is, some people deserve dictators… Only a ruthless dictator will tamp down their internal strife. When the cat is removed, the mice will play! We can NOT afford to be World Cop, even if we were good at it! Which we’re not!

      2. We’re not at war with anyone, but that doesn’t really translate to an argument in favor of free trade with Iran, North Korea, ISIS. or anyone else we currently have sanctions against

        1. Dude, haven’t you heard? We’re at war with Terrorism, and it’s everywhere and eternal.

      3. News flash, we’re not at war with China.

        “The supreme art of war is to subdue the enemy without fighting.”

    2. The problem is I don’t think it is hurting them more than us, at least not their leadership

      1. I disagree, but that’s certainly a sensible objection.

        I do agree that Trump’s tariff and trade policies don’t hurt the Chinese leadership directly. They merely threaten a hit to Chinese economic prosperity, which carries some political threat to Xi. Either from actual riots or revolts, or more likely from a palace coup from his subordinates. So he will be aware of the pressure.

        I doubt very much that the pressure will be suffcient to change Chinese policy before November 2020 – ie China is battening down the hatches and hoping to sail through into the calmer waters of President Warren or whoever. But if Trump wins again, they’ll probably crack.

    3. This is about China stealing technology and know how from US companies in addition to unfair subsidies to their industry. They break every rule of the WTO and get away with it.

  2. The OTHER massive economic failure of the Trumptatorship’s bigoted exenophobia is becoming more obvious with respect to immigration. Canada has real leaders, who understand these things, compared to our knee-jerk exenophobic-nationalistic my-country-first Trumpistic jerks. So Canada is now attracting venture capital from the USA, for cutting-edge development of AI. In Canada, you can bring in hard-working immigrants. In the USA, you cannot (at least, not nearly as much). So the venture capital now goes to Canada.

    Trade restrictions can sometimes make sense from a national-defense standpoint. In this case here, if this kind of things goes on and on and on, we’ll have to start depending on Canada for USA defense, when the AI-driven warrior killbots are running the wars!

    https://venturebeat.com/2019/10/05/why-we-moved-our-silicon-valley-startup-to-canada/
    Why we moved our Silicon Valley startup to Canada

    1. Of course Canada has open borders. Unlike the US, their current leader isn’t a racist.

      1. Canada does not have open borders. And Trudeau is a flaming idiot who is openly condescending to other people’s culture and dress.

    2. In Canada, you can bring in hard-working immigrants. In the USA, you cannot (at least, not nearly as much).

      Take it from a “hard working immigrant” to the US: you can’t bring in hard-working immigrants into the USA because the US immigration system is clogged with illegal third world migrants and petitions for relatives. The fault for that lies entirely with Democrats; Trump has been trying to change it.

      The OTHER massive economic failure of the Trumptatorship’s bigoted exenophobia is becoming more obvious with respect to immigration.

      No, the massive failure in the US is that the US is full of morons like you who believe propaganda that tells them that a president who tries to enforce US immigration law and tries to move the US towards skill-based immigration like Canada or Australia, who is married to an immigrant, is a “xenophobe” and a “dictator”.

  3. We should unilaterally end all tariffs and subsidies. If other countries want to subsidize our wealth or punish their own consumers, that’s on them.

    1. We should unilaterally end all tariffs and subsidies.

      True, but only if you realize that entitlements and social spending in the US is a “subsidy” just as much as handing $10 billion to Boeing is a subsidy.

      As long as we continue government spending on entitlements and welfare, we can’t have free trade or free movement of people.

  4. Drumpf’s (illegitimate) victory in 2016 directly caused what Nobel Prize winner Paul Krugman called a global recession, with no end in sight. The economy is so terrible that even a low unemployment rate is actually a troubling sign. According to AOC, it just means people are working 2 or 3 jobs and barely surviving.

    And of particular interest to us Koch / Reason libertarians, Charles Koch’s net worth is stagnating below $60 billion. Unacceptable!

    #DrumpfRecession

  5. “Trump’s Economic Strategy Is Bound to Fail”

    As is Reason’s strategy to support coercive monopolies like state government – as long as they are limited.

    That is bound to fail too .

  6. When the US imports more than it exports, by orders of magnitude, how does the US make money?
    That is, where does the money come from?

    1. Simple: debt. And Americans are being taxed to service that debt.

      Eventually, that won’t work anymore, and either we get hyperinflation or we default on our debt.

      This isn’t just bad for the US, it’s also bad for the foreign nations that lend us the money, not just because sooner or later they are going to lose it, but also because that money should have gone into capital investments in developing countries, rather than pointless consumerism in the US.

      1. It’s not nearly that simple. The U.S., printers of the world’s primary reserve currency, also exports dollars. Internationally, they’re held privately, held in private banks, held in national banks. That’s part of the reason we have run a trade “deficit” annually for so, so long. The U.S. Dollar is one of our most successful exports ever.

    2. Absolutely agree. Just because the masses can buy cheap clothes and toys doesn’t make trade a success when the masses are on the dole because there are no jobs.

  7. (1) Trump’s tariffs are punitive tariffs on China, intended to effect political change in China; they are not an attempt at protectionism. After supply chains reorganize, they should have little effect on US consumer prices.

    (2) The Lerner symmetry theorem simply doesn’t apply here, because pretty much all its assumptions are violated.

    (3) US imports are financed through debt; the US national trade deficit will eventually disappear, like all trade deficits. In the case of the US trade deficit, if we don’t do anything to avert it, it will disappear when the US defaults on its debt or hyperinflates the dollar. That’s a mathematically perfectly fine solution, but it’s one we would be prudent to avoid.

    In short, Veronique, your article takes the cake for most amount of economic ignorance crammed into a single article on Reason this year. Congratulations!

    1. No, the above comments take the cake for the largest amount of economic ignorance that I have seen in a LOOOONG time!

      1. China uses trade as a weapon. It is the lopsided trade that China has with the world which resulted in them becoming a menacing superpower.

  8. “With more of its money abroad, foreigners have more money with which to buy the home country’s exports.”
    There is an obvious flaw in this reasoning in that it does not apply to the US dollar. The US dollar as the global reserve currency is the basis of global trade and is the official currency of over two dozen nations. As such, there is no need for US dollars to ever return to the US, and this article is entirely without foundation or merit.

  9. What would the US economy look like if the entire income tax burden switched to tariffs?

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