trade deficit

There’s No Such Thing as a Trade Deficit

Concerned with how trade is commonly discussed, Greg Mankiw recently issued a plea to journalists to halt the use of subjective terms to describe trade flows. Rather than words such as “deteriorated” or “improved,” the Harvard economics professor (and noted textbook author) proposes that writers employ more objective language such as “the trade balance moved towards surplus.”

Trump’s Unfair Deals?
A Free-Trade Parable

As Dan noted, President Trump has been in Asia, making a state visit to China and then meeting with foreign leaders at an Asia-Pacific Economic Cooperation forum in Vietnam. As part of the trip, and perhaps in an effort to recapture his populist mojo amidst cratering job approval numbers back home, he has remounted one of his favorite hobby horses: decrying “unfair trade deals” that he says put America at a disadvantage with its trading partners.

The Simple Analytics of Why President-Elect Trump’s Policies Will Probably Result in a Trade War with China

The United States has recorded a trade deficit in each year since 1975. This is not surprising. After all, we spend more than we save, and this deficit is financed via a virtually unlimited U.S. line of credit with the rest of the world. In short, foreigners in countries that save more than they spend (read: record trade surpluses) ship the U.S. funds to finance America’s insatiable spending appetites.

Japan and more recently China have been the primary creditors for the savings-deficient U.S. And since their exports are largely manufactured goods, the real counterpart of their buildup of dollar claims on Americans is for them to run export surpluses in manufactured goods with the U.S. The accompanying chart shows the contribution of Japan and China to the U.S. trade deficit since the late 70s.

Percentage Contribution to U.S. Trade Deficit by Country

So, the U.S. savings deficiency has contributed to the hollowing out of American manufacturing. But, you wouldn’t know it by listening to President-elect Trump. He never mentions America’s savings deficiency. Instead, he claims that American manufacturing has been eaten alive by foreigners who use unfair trade practices and manipulate their currencies to artificially weak levels. This is nonsense.

To get a handle on why the President-elect Trump – and many others in Washington, including the newly-elected Senate Minority Leader Charles Schumer – are so misguided and dangerous, let’s take a look at Japan. From the early 1970s until 1995, Japan was America’s economic enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the trade deficit and destroyed U.S. manufacturing. Washington also asserted that, if the yen appreciated against the dollar, America’s problems would be solved.

The Economics of Trade: Wilbur Ross Is Mistaken

Billionaire investor Wilbur Ross, a supporter of Donald Trump, made the following comment in a letter to the Wall Street Journal (Aug 15): “It’s Econ 101 that GDP equals the sum of domestic economic activity plus “net exports,” i.e., exports minus imports.  Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

In reality, the last sentence –beginning with “Therefore”– does not follow from the first.

Mr. Ross is alluding to the demand side of National Income Accounts, wherein Y=C+I+G+ (N-X). That is, National Income (Y) equals spending on Consumption (C) plus Investment (I) plus Government (G) plus Net Exports (Imports N minus Exports X).  

Taking such accounting too literally, a reduction in imports may appear to be mathematically equal to an increase in overall real GDP.  But that is dangerously incorrect, as the 1930s should have taught us.

The accounting is true by definition (a tautology). But economics is about behavior, not accounting identities.

If trade deficits “weaken our economy,” as Mr. Ross asserts, then we should expect to see real GDP slow down when trade deficits get larger and see real GDP speed up when trade deficits get smaller or become surpluses.  What the data show is much different – the exact opposite in fact.  

Fact Checking the Washington Post’s Fact Checker on Trade and Manufacturing

Pinocchio Quattro!” is Washington Post “Fact Checker” Glenn Kessler’s response to Donald Trump, for his claims about trade, currency manipulation and manufacturing. No doubt the 4-pinocchio distinction is well-earned. Actually, without issuing a score, my analysis in Forbes today reaches similar conclusions.

Reading Kessler’s explanation and justification for the award, I was pleasantly surprised by how well he characterized and conveyed the salient, underlying trade issues. Non-trade experts and non-trade-beat reporters often miss the nuance and get things wrong. Nonetheless, for the purpose of even greater precision, I’m going to reiterate, clarify, amplify, and slightly modify some of the points Kessler makes. (Thanks for being a prop, Glenn).

Time to Lose the Trade Enforcement Fig Leaf

During his SOTU address last week, the president declared it a national goal to double our exports over the next five years.  As my colleague Dan Griswold argues (a point that is echoed by others in this NYT article), such growth is probably unrealistic. But with incomes rising in China, India and throughout the developing world, and with huge amounts of savings accumulated in Asia, strong U.S.

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