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Free Minds & Free Markets

Trump's Ignorant Trade War

The president should stop worrying about the trade deficit and learn to love free trade.

Skypixel/Dreamstime.comSkypixel/Dreamstime.com"We're putting the trade war on hold," Treasury Secretary Steve Mnuchin announced on Sunday. "It's about structural changes. It's about lowering tariffs. China has committed to lower tariffs on many things and made structural changes to protect our technology."

Alas, that didn't settle the issue. Several hours later, U.S. Trade Representative Robert Lighthizer reaffirmed his belief that tariffs remained an important tool to "protect our technology." Finally, on Wednesday, the president tweeted that "Our Trade Deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion."

I am not sure what Trump means by "a different structure." Nor am I sure what a new framework would require. And I'm certainly not sure there's any upside to trying to make sense of all these conflicting statements.

Did the Chinese commit to the reduction of their bilateral "trade surplus" with the U.S.? Maybe. Are they committing to lowering their tariffs on American cars? Probably. Will the Chinese agree to changes in rules on foreign investment and ownership in China? Sounds like it. Will they stick to their commitments? Maybe, maybe not.

Yet one thing is sure: To the extent that China reduces its tariffs on some U.S. products and, in turn, America holds back on imposing tariffs on Chinese products, American and Chinese consumers will be the true winners of these negotiations. But not in the way many people think.

Reduced American tariffs on imports from China are great for the American people. Some Chinese exporters will also gain, but the bulk of the benefits will be reaped by consumers in the U.S. The same goes for China: The gains from reducing their tariffs on American exports will accrue overwhelmingly to Chinese consumers.

Let's suppose that the only way to truly satisfy the Trump administration's protectionists, and hence to put a permanent end to the threat of a trade war, is for China to increase purchases of U.S. goods by an annual $200 billion in order to zero out the trade deficit. This is not a far-fetched assumption, since it was the reason administration officials gave last week after the original announcement of the US-China detente.

That means they'll probably be disappointed. The Chinese government can make all the promises it wants about lowering its tariffs on American products, thus increasing demands for US goods. But those promises do not come close to assuring a reduction of the bilateral trade deficit, despite the fact that a reduction of Chinese tariffs would certainly increase Chinese purchases of U.S. goods.

Bilateral trade imbalances are meaningless because trade is global, not bilateral. That's why it's called globalization.

Suppose that there are only three countries: the U.S., China, and France. In 2018, Americans buy $1 billion of steel from the Chinese; the Chinese buy $1 billion of wine from France; and the French buy $1 billion of lumber from America. Each country's current account would be balanced—that is, it exports the same amount that it imports. But each country will still have a bilateral trade deficit with another country.

Now suppose that in 2019 China reduces some tariffs it has against exports from America. The Chinese then, in 2019, buy $500 million of lumber from America. From where, we must ask, did China get this $500 million? After all, dollars don't fall from the sky, and Chinese people have to acquire them one way or another before they can spend them.

One possibility is that China has increased the amount of steel it sold to Americans that year to $1.5 billion. In that case, the Chinese would spend $500 million on American lumber and (we may assume) the remaining $1 billion of its export earnings, as in 2018, on wine from France. The French, as in 2018, spend $1 billion buying American lumber.

In the above hypothetical example, America's bilateral trade deficit with China would remain in 2019 the same as it was in 2018—$1 billion—even though the Chinese bought more American exports.

Each country continues to have an overall current account that is technically "balanced." We Americans in 2019 do export more lumber, but we also import more steel. The additional jobs created in the U.S. by the reduction of Chinese tariffs are offset by additional jobs destroyed: More Americans work in the lumber industry and fewer in the steel industry.

Things could play out many different ways if the Chinese were in fact going to buy more U.S. exports. We can find many scenarios in which America's trade deficit with China falls on paper. Indeed, it's even possible to describe realistic scenarios in which America's trade deficit with China rises.

But it doesn't matter. Bilateral trade deficits don't have any economic relevance. The world is made of more than two countries, so it would be shocking, rather than normal, if each pair of countries has "balanced" trade. (If you still aren't convinced, you may want to read this superb piece by Bob Higgs.) It is also almost impossible to determine the particular factors that cause a bilateral trade deficit to change directions.

One last thought. While Trump and his protectionist acolytes spend a great deal of time talking about the trade deficit with China as evidence that some great corrective measures are needed, I wonder why he is silent about the many countries with which we have a trade surplus.

Does he think they should demand that we sell less to them in the name of their trade deficit with us? Does he think the U.S.'s "unfair behavior" is the result of this trade surplus in our favor? Or is this just more evidence that the president is making policy based on ignorance, ideology, and a refusal to reckon with facts?

Photo Credit: Skypixel/Dreamstime.com

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  • Palin's Buttplug||

    To the idiot Trump base free trade is "globalism" and is to be avoided and mocked.

  • HaiI Rataxes||

    And you know all about being avoided and mocked.

  • Hail Rataxes||

    Hi Tulpa

  • BYODB||

    Care to describe how the status quo is 'free trade'? Last I checked, it isn't at all and I doubt Trump will do anything to change that one way or another.

    Well, except for the part where there will be lower tariffs thereby coming closer to 'free trade' than it was previously.

    Not that I really credit Trump with any of this. The Chinese will probably do anything to keep the technology flowing. They save a lot of time and money on innovation by simply stealing it from everyone else, after all.

  • No Yards Penalty||

    I hate to agree with you Palin, but you're right.
    The Contards and Fauxbertarians at the Federalist are always crying about GLOBYLYZAYSHUN!!!!!!!!!!!11!!!!!!!!!
    Esp the under-educated factory monkeys who think Trumpanzee is protecting their phony-baloney jobs.
    It's slightly better around here. But only barely.
    There aren't too many actual libertarians left around here, I'm afraid.

  • Citizen X||

    Trump should do lots of things.

  • I am the 0.000000013%||

    I admire your rich inner fantasy life.

  • Jerryskids||

    And I'm certainly not sure there's any upside to trying to make sense of all these conflicting statements.

    You can safely use that line in any discussion of anything Trump says. Is he stupid, is he crazy, is he lying, is he "negotiating", is he just compelled to have every random thought that pops into his head fall out of his face? The only thing that matters is that there's a good chance he's going to say something completely the opposite, if not in the next couple of seconds at least in the next couple of days, which makes trying to attach some significance to anything he says a meaningless exercise.

  • DajjaI||

    Huge trade deficits aren't actually a bad thing so stop worrying.

    That wacky tobaccy is really getting around.

  • Shirley Knott||

    Read and think about the Higgs piece linked in the post.
    You will see that huge trade deficits are an irrelevancy.

  • DajjaI||

    Did you read it? It's preposterously stupid from the outset. If short people have a trade deficit with tall people, then it's worth understanding why that is. It's certainly not 'meaningless'. Then the piece only gets worse from there.

  • Shirley Knott||

    Yes, I read it.
    Did you think about, or merely fire up the rage and ignorance you went in with?
    Never mind, the answer is clear from your response. Which, by the way, is a non sequitur.
    Nobody is saying "don't wonder about the why of it."
    The reductio is pointing out the practical and effectual meaninglessness of the imaginary artifact crafted by accounting choices.

  • DajjaI||

    If short people have a trade deficit with tall people, it could be because one side is short-changing the other. So yes it's not just not meaningless, it's meaningful. This is a blatant contradiction in your brainless claim. Q.E.D.

  • JoeBlow123||

    From he article:

    "What economic significance can we ascribe to the aggregate of monetary flows between members of set A and members of set B?"

    If all the short people do is buy stuff, all their money flows to the tall people. Short people get cheap shirts, tall people get currency. The tall people then need to do something with this money (short people denominated currency) so they either buy short people treasury bills or short people assets. If they own lots of short people assets they can then start dictating the terms of trade more and more. Creditors make the rules.

    Trade is used as a weapon and a tool in the authoritarian government of the tall people. Especially when the government of the tall people is artificially keeping wages low and their currency cheap so they can sell more stuff.

  • Paloma||

    Let's parse this. Short people get shirts. Tall people get money. So far so good. So when those tall people invest in short people treasury bills or short people assets, then those short people get their money back!

    Then the short people have money AND shirts. Basically the short people get free shirts.

  • JoeBlow123||

    "Then the short people have money AND shirts. Basically the short people get free shirts."

    Short people have shirts for days and they have money. But they no longer own things and creditors always make the rules. Furthermore, when the short peoples money is then reinvested offshore in tall people land, the no longer even have that money. They just have shirts.

  • vek||

    I don't get how it is so hard... If you own your own house that asset has a lot of value for you. If you're forced to sell your house to pay for consumption items to continue to survive, this makes you less wealthy.

    All of the poorly thought out nonsense free trade arguments completely ignore WHO owns the ASSETS at the end of the cycle of running a deficit. Anybody who thinks who owns the assets (capital) in capitalism doesn't matter is a grade A moron. If a person sells his house for consumption, but still has an income from working, he is still a LOT poorer renting from the people that sold him the consumption items that now own his house. Likewise when a nation sells off trillions in assets to pay for tennis shoes and t-shirts, and their skyscrapers get bought by the guys that sold them the shirts, they have traded a short term non-durable good for a long term income producing asset.

    People who own income producing assets get richer and richer, people who consume everything get poorer. This is the same as the eternal divide between the working poor/middle class and actual wealthy people... Wealthy people invest in assets that produce them more wealth. America is on the wrong end of this equation the last few decades, period.

  • Right-Left=Zero||

    One must be quite ignorant to swallow that short/tall analogy.

  • Iheartskeet||

    Trade deficits are irrelavent, and fretting about them the province of the economically illiterate.

    If you think they ARE relavent, how is it all supposed to work ? Only the US allowed to have surpluses ? All trade equally balance out ? What is your preferred mix of economic micromanagement ?

  • Presskh||

    Perhaps if other countries didn't have tariffs on imported goods or discourage their importation through various other means, we wouldn't need barriers either.

  • Shirley Knott||

    The burdens they impose on their citizens are not our problem.
    Unilateral free trade would be a huge win for us.

    Think about it this way — we blockade enemy ports to hurt the enemy. Why would we blockade our own ports? That they blockade theirs does not harm us, only them.
    If blockades work as advertised, and it seems clear that they do, then tariffs are prima facie self-inflicted wounds.

  • JoeBlow123||

    "Why would we blockade our own ports?"

    Why don't we trade with North Korea? Because we don't want them to be wealthy. Why send wealth to totalitarians?

  • Paloma||

    Exports are not "sending wealth". Exports are the COST of imports. North Korea, known as the Hermit Kingdom, doesn't trade with most countries. They are an autarky, which is Korean for poor.

  • JoeBlow123||

    "Exports are not "sending wealth"."

    We can help North Korea to become rich or keep them poor by engaging or not engaging them in trade, development, and investments. I would assume the stark contrast between South Korea, long a trade partner of America and American friends such as Japan, compared to North Korea, at a state of war and kept out of the world market in large part by America, would serve as an easy indicator the power trade has to lift countries out of poverty.

    Or perhaps we can also turn to Cuba who has been economically blockaded by America for decades. If you do not call trade "sending wealth" be my guest, but it is disingenuous to pretend that if America intentionally keeps a company from American markets (often by extension the global market) they will magically become more wealthy. Or if you prefer a more contemporary example let us go for Iran.

  • vek||

    The thing that many miss is that sometimes trade goes beyond economics. In fact it ALWAYS does for every nation that isn't run by pure libertarians... Which is to say all nations as they presently exist. If I'd have been Clinton/Bush (the presidents when things were being haggled out/first implemented) I would have demanded China open up their markets completely before we dropped barriers. They probably would have caved, and if they hadn't it wouldn't have upset the status quo because we weren't entangled with them back then.

    Now we could still force their hand, and probably should, but there will be a lot higher cost to correct the situation. This is why fools and traitors should not be running the country. It's hard to say if they were doing it intentionally to screw over the industrialized countries of the world, or if they were just so stupid that they didn't see the obvious outcomes that would happen... Either way it's unforgivable. At least Trump is trying to fix the BS in some small way.

  • Deconstructed Potato||

    The Chinese government will invest in and subsidize any manufacturing that undercuts and ultimately destroys western industry, even at huge losses, because the ultimate gain is complete dependence by the west upon Chinese industry. There's ulimately nothing that can be done to stop this. Trump can play Cnut (not a typo) and yell at the tide, but ultimately resistance is futile. The Chinese economic war machine is too powerful. Hail Ants.

  • I am the 0.000000013%||

    If this sort of thing worked, western democracies wouldn't exist.

  • Paloma||

    How will it destroy "western industry" if we have their stuff and they have our dollars? What are they going to do with our dollars? Subsidize their industries so they sell can keep selling their stuff to us for less.

    If you can buy a shirt more cheaply than you can make it yourself, is Ross somehow undercutting your household economy?

  • JTP||

    If that's true, why wouldn't the Chinese just go ahead and subsidize their manufacturing 100% and give ustheir products for free? If their ultimate goal is to monopolize manufacturing, why waste time by only partially subsidizing their products? And if they did just give us free stuff, would that be bad for the consumer in the US?

  • vek||

    Seriously? You don't get it? The above is a bit of an exaggeration, but they ARE trying to dominate key industries via massive subsidies.

    The Chinese needed our capital, mainly to purchase capital goods like machinery. They also needed technology. This was to get things kick started since they had basically nothing. Now that the train is rolling they're playing almost by western style capitalistic rules, but a little different. Imagine this:

    If a Chinese peasant farmer produces $2,000 USD a year in productivity, and a steel worker produces $8,000 USD a year in productivity... You could subsidize steel worker by 50% and STILL double that workers productivity. Nobody in the western world does this because they're not interested in increasing the overall size of the economy per se. There's no incentive. But when your government mandated goal is to boost GDP and worker income the math works out completely different.

    That's how they can subsidize industry while still achieving their goals. The alternative is being a peasant farmer, so it is VERY easy to achieve something above that even after massive subsidy. The west just doesn't have the stomach for doing it, so our industries have been getting obliterated. It doesn't help that that 8K a year Chinese steel worker is probably competing against a 50K a year American/European steel worker in the first place. They have a natural advantage as is, and increase it still further because their GOAL is different than in the west.

  • BYODB||

    Maybe by 'different structure' they mean that American corporations won't need to hand over their technology to a corresponding Chinese firm so they can copy that technology for domestic and military use?


    Probably not, though, since no one really gives a shit about this. Who cares if China is able to reverse engineer technology (or is just given it outright) and apply it to their military hardware or sell it themselves as a knock-off, we're making a profit for now right?

  • Echospinner||

    Nucor is a major steel producer in the US. They use mostly scap steel. Worth thinking how in this market innovation can lead to steady profit and growth.

    Market economy beats central planned economy every time.

  • buybuydandavis||

    " Nor am I sure what a new framework would require. And I'm certainly not sure there's any upside to trying to make sense of all these conflicting statements."

    I don't know and I don't care to know, because I have my dogma:
    "Enriching communist Dictators for Life with the world's largest economy can't possibly have any negative consequences"

  • No Yards Penalty||

    Buybuy, take Trump's cock out of your mouth. Or John's. Or loveconstitutions.
    That's assuming you're actually 3 different Contards.

  • zombietimeshare||

    I love free trade. If only what is currently called free trade even remotely lived up to its name.

  • vek||

    The scenario here is completely inaccurate. That's a magical everything is balanced scenario... The thing is we DO NOT have an overall balanced trade deficit. So it really is more like this:

    Let's say a guy inherits 1 million dollars in net worth from his parents, who were very hard working and studious people, when they kick the bucket when he's 25. He went to college, so he makes good money and feels he deserves a good lifestyle! 10K a month let's say.

    Well, he spends 12K a month since he has 1 mil in assets. No biggie, he only has to come up with an extra 24K a year!

    So year after year he sells off assets his parents left him. One year it's the cabin that covers him for a few years, then the boat, then the rental house. One of his smart friends gains knowledge of his finances and tells him he should start living within his means, otherwise he'll run out of assets someday... He doesn't listen.

    One day after 41 years he realizes all he has left is the silverware, some fine china, and a few other trinkets... All the other assets are gone because he consumed more than he produced for 4 decades! All that wealth and assets his parents worked so hard for are now owned by the people that produced the things he bought over the years. He really enjoyed all the stuff he bought, but at 66, with zero assets, he's kinda in a bad financial spot.

    THE END

  • vek||

    That is closer to what is really going on. We're consuming more than we're producing as a nation with respect to trade. So every year we run a large overall deficit, we're having to sell off assets to pay for current consumption. It's not in danger of making the whole country broke just yet, but we have literally sold off several trillion in assets (skyscrapers, ownership in fortune 500 companies, etc) to finance sneakers and t-shirts.

    Not all foreign investment is bad of course. However running a large, systemic, deficit for decades on end IS NOT positive for the net worth of the country or its people. The USA and its citizens used to own more foreign assets to the tune of trillions of dollars than foreigners owned US assets. That has now reversed. We used to collect income from our foreign investments, causing a net enrichment of the USA. Now that is reversed and there are hundreds of billions a year that flow out to foreign owners with no additional sales transactions needing to take place.

  • vek||

    Many of you people seem to have a very short sighted, middle class view of this situation. Middle class people spend everything they make like chumps, and never acquire very many assets. They have trinkets. Wealthy people invest in assets that produce them more income. America used to be a nation of savers and investors, now we're chump consumers. The Chinese understand the value of spending less than you make and buying assets. This will not bode well for the long term health of the average US citizen.

    Again it's not doomsday tomorrow over this stuff, but it is NOT a positive thing either. It's somewhere in between.

  • Plopper||

    So does making stuff more expensive so they have less to save and less to invest with help this somehow?

    What was your argument again?

  • vek||

    You're obviously being disingenuous, but I will answer you anyway for others that might care/have a brain. I'm not a knee jerk idiot on this stuff. My opinion is based on math, logic, and the real world as it exists. Free trade theory was developed in a time without fiat currency when you LITERALLY ran out of gold/silver if you ran a deficit for too long, and makes many assumptions that are the exact opposite of how the real world is as it exists. Like it or not your fate is directly tied to other Americans via taxes, socialized spending, if your neighbor has a higher income he has more to spend at your business etc.

    Contrary to popular belief many items made in the China/etc are NOT 80% cheaper than those made in USA. Often time the savings are only a dozen or two percent. When they are 80% cheaper, which is far and few between, it does make sense to import. But when they're very small savings, it in fact leaves the nation less well off, even though on an individual basis it seems to be a win.

    Example: $100 shoes made in China, or $120 made in USA.

    The customer saves $20, win! But we have to sell $100 in assets to import them. This means for the stock market we lose perhaps 7% a year return on that $100 invested, private assets often return 10% or more on capital.

  • vek||

    So in a mere 3 years the US owners of said assets have now lost more of a return than the entire savings from the import. This is not to mention that if that $120 had remained here in the form of wages at the shoe factory, taxes paid on various things, etc it would have been spent through the US economy several more times, generating even more GDP and investment.

    BUT he saved $20! That can now be spent/invested! True. But to make $21 return in the 3 years that it took to eat up the savings, one would have to make about a 30% return a year to cover that... That doesn't happen.

    The above is an example of how our nation becomes less wealthy, even while an individual may benefit up front. A renter might enjoy renting a house, but the homes owner is still the one making out better financially. Again when the savings are larger it can be better to import... But to say that every single instance of outsourcing is automatically better FINANCIALLY is false. Having greater choice is nice, but having greater choice is not the same thing as hard dollars and cents financial gain. They're different things and can be "valued" differently by different people at different times.

    There's nothing wrong with running a deficit from time to time, as a person or as a country. It's when it becomes massive and systemic that is can be a problem for your long term fiscal health.

  • Matdarat||

    Veronique, there is a bit of a problem with your idea of free trade with China...it doesn't exist. China has cheated on trade for over twenty years by not allowing their currency to trade freely in the currency market. Although they PROMISED Pres Clinton they would float the Yuan in exchange for a few favors they never followed through. So, as long as the value of the Yuan is fixed by the PRC there is no FREE Trade with China. Fix that and see the imbalances trend to an acceptable level.

  • Blaine Gilless||

    Having read both articles by Veronique de Rugy, Ph.D., and Donald J. Boudreaux I began to wonder what I was missing. Then I realized they are both from the Mercatus Center at George Mason University. Which tells me its more about a bias than an economic theory but I am not a Professor of Economics so I had to wonder what I was missing. It seems the basis of their arguments is that a trade imbalance is not bad. And a trade imbalance with one country is really not bad. Also, it seems both writers are upset that they might not be able to buy cheap knick-knacks from China. So I wonder if a country imported just about everything but had few exports if this theory would hold water? Their theory seems to forget a few key things. First "China 2025" states they intend to dominate certain world markets. Second China subsidizes businesses it has interest in. Third, a large part of our national debt is owed to China. We are transferring our wealth to China and they are using it to buy up market share and we know that monopolies are not good. And it appears that China practices currency manipulation as well. So if someone would care to enlighten me as to how trade deficits are good and why Trumps attempts to close them are bad.

  • texexpatriate||

    A tariff can be applied and it can be lifted. I think Trump's tariffs on Chinese goods will be lifted. Why? Today I can buy a violin made in a Chinese workshop for $1000 that would cost me $3000 or $4000 if made in the USA. Trump will soon learn that his tariffs raise the cost of practically everything Americans buy, from lavatory drain plugs to Violins. We do not have an economy that will support re-establishing the manufacturing base required to start over.

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