Donald Trump’s Trade Deals

Tom Friedman had an op-ed last week in which he argued that if Donald Trump – who has been complaining that the U.S. government negotiates bad trade deals – were negotiating the Trans Pacific Partnership (TPP), he would negotiate pretty much the same deal that President Obama negotiated. But I think that Friedman misunderstands how Trump and some other businessmen, especially various high profile investors, think about trade. And the reason I mention investors is that’s who Trump seems to have in mind as trade negotiators:

I take a guy like Carl Icahn, you take Henry Kravis, you take so many of the guys that I know, and you say, “You know what? I’d like you to watch over the deals that are being made with China because we’re getting killed on trade.”

Believe me, we will be so good. You should get a guy like Carl on, very smart, great negotiator. We will be so good.

Now, I don’t know exactly what Carl Icahn thinks about trade policy, trade deficits, etc. I looked around the internet a bit, but did not see anything.  (As for Henry Kravis, he signed this letter in support of Trade Promotion Authority and the negotiation of the TPP, although that was before the final TPP text was made public). But I do know what another famous investor, Warren Buffett, thinks.  In the past, he has argued for a program that manages exports and imports to keep them roughly in balance. Here’s what he proposed a while back:

… My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.

We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties—either exporters abroad or importers here—wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.

Warren Buffett is a great investor, but with regard to trade policy, he is in over his head. The idea of balanced trade completely misunderstands how trade works. A trade deficit is not like a budget deficit, where you borrow money from someone and have to pay it back. If the U.S. has a trade deficit with Mexico, for example, it just means that Americans are buying more from Mexicans than Mexicans are buying from Americans; it does not mean that Americans now owe Mexicans the deficit money. There are a variety of ways these things work themselves out, but the main one is that the money gets reinvested in America, which most people would agree is good for America. Thus, a trade deficit is not something that needs to be fixed with some sort of government intervention.

So, I think Friedman is wrong that Trump would have negotiated the TPP just like Obama would. My best guess is that Trump, like Buffett, wants trade deals that lead to trade balance. In effect, he wants guaranteed import and export outcomes, rather than deals that reduce protectionist tariffs (which is what trade agreements are mainly about). From a business perspective, an outcome-based approach to negotiations may make sense, but it is total nonsense in terms of trade policy. You could, in theory, make an outcome-based deal where U.S. companies sells $1 billion of goods and services to Mexicans, and Mexican companies sell $1 billion of goods and services to Amercians. But that does not remotely resemble free trade, and it’s not what we want out of a trade agreement. Unfortunately, it’s how Trump and a few business folks who don’t understand economic policy appear to view the world of trade.

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