Throughout history trade goods have flowed to the country with the highest standard of living, for the simple reason that they can pay more for it — whatever it is. So the rich country, in this way, has a “trade deficit” with poorer countries. Is that bad for the rich country, and a reason to punish the poor countries? No, it is not.
With thousands of economists around the world studying Donald Trump’s trade war, I’m surprised that none of them, to my knowledge, have cited this simple fact: that a trade deficit often is not a sign of weakness, but a sign of strength.
It was true for ancient Egypt, it was true for the Aztecs, it’s true for us.
Many more factors than trade balances enter into whether a country, a region or even a city is prospering economically. It’s not a simple subject, and it is easily manipulated. Trump’s lies, in this as in everything else, are manifest, obnoxious and obvious.
For instance, when Trump claims that the United States ran an $807 billion trade deficit with other countries in 2017, he counts trade in physical goods: cars, steel, dairy products and so on. But according to the same page of that Census Bureau report, the United States registered a $255 billion trade surplus with the rest of the world in services: an enormous category that includes movies, software, tourism, legal services and college tuition paid by foreign students to U.S. universities.
That’s a 32 percent error egregiously inserted into reality, for no discernible reason other than to mislead his own country about a complicated subject — and give the president another phony reason to holler about how unfair the world is.
Egregious? Yes: The service industries employ more than two-thirds of U.S. workers. There is no reason to leave them out of the equation, unless it’s to stir up hatred and xenophobia, presumably in the interest of the workers he just ignored.
He’s also complained, on Twitter, that Canada is preying upon us, its weak southern neighbor, through a “270 percent tariff on Dairy Products!”
That’s more fake news, from the golden throne.
Canada sets a quota of U.S. dairy products allowed to come in with zero or low tariffs. Tariffs above the quota can be taxed as highly as Trump says. But the United States does the same thing to Canada. We tax Canadian dairy imports so stiffly that our dairy states sold $792 million in goods to Canada in 2017, while Canadian producers sold just $149 million in dairy products to us, according to the Brookings Institution — a $643 million trade surplus for the United States.
Yet Canadian Prime Minister Justin Trudeau doesn’t bellyache about unfair U.S. dairy tariffs. That’s because Trudeau knows he cannot whip up political gain for himself by whining about foreigners.
Another of Trump’s trade bugbears is the relative difference in the tariffs that the United States and the European Union apply to automobile imports. He claims, for example, that the U.S. government charges only a 2.5 percent tariff imported luxury sedans that BMW and Mercedes make in Germany and elsewhere, but U.S.-made Lincolns and Cadillacs are charged a 10 percent tariff when exported to the 28 countries of the European Union.
This makes it sound like the United States is getting played by those Machiavellian Europeans. But the U.S. government also uses tariffs to protect its auto market — we have only chosen to protect a larger segment of the market than luxury cars, and with much higher tariffs. President Lyndon Johnson imposed a 25 percent tariff on imports of pickup trucks in 1963, which remains in place today.
Other examples abound.
Putting aside the inanity of using the (number-juggled) trade deficit as a scoreboard to determine if the United States is “winning” or “losing,” most economists say larger economic forces determine the deficit, including the government’s fiscal deficit, which Trump’s tax cut bill increased, on steroids.
Domestic industrial policy is far more important than juggled numbers about trade.
For instance, during the Elizabethan Age, Spain received the lion’s share of the gold and silver produced by slave labor in the New World, but had to declare bankruptcy repeatedly, because despite its newfound riches, Spain crippled its economy, at home and overseas, by fierce restrictions on what manufacturers were allowed to do, in its colonies or at home in Spain. England did the same thing to its colonies, until we rebelled.
What crippled Spain was not the trade deficit its government and upper 1 percent incurred by buying foreign goods, it was the government’s idiotic industrial policies, which made it easier to buy foreign-made goods than to encourage domestic producers.
See: Harley-Davidson, 2018.