Perspective on Trade Deficits

Don Boudreaux's letter to President Trump.

DB is on target - but there is more to the issue.

One reason for Trump's policy on trade probably is that trade is so little understood by most voters, who feel as Trump talks.  Given that the Politicians play to voters' lack of understanding and reinforce it, nobody who tells the truth is likely to be elected.

Which of the following do you prefer?

1. We import (buy) a lot of things from China and pay X dollars for them.  China uses the X dollars to import (buy) a lot of things from us.
2.  We import (buy) a lot of things from China and pay X dollars for them.  China stashes the X dollars in a large vault.
3. We import (buy) a lot of things from China and pay X dollars for them.  China uses the X dollars to invest in US companies, who buy (build) X dollars of factories in the US and employ N US citizens.
4. We import (buy) a lot of things from China and pay X dollars for them.  China uses the X dollars to buy US Treasuries.

In Case 1, the US trade deficit is zero.

In Cases 2, 3, and 4, the US trade deficit is X.

Case 2 is the best of all possible worlds.  We get useful stuff from China and they get pieces of paper.  This is despite that the US has a large trade deficit and China has a large trade surplus.  Evidently a trade deficit can be the best thing in the world and a trade surplus the worst thing in the world.

Cases 3 differs from Case 1 only in that the things China's buys (factories, real estate, etc.) remain in the US, hence are not counted as US exports, hence create a trade deficit. However, just as much US employment is created by China buying these things as in Case 1.  If this does not convince you that the trade deficit is a meaningless computation, read Thomas Sowell's Basic Econmics book.

Case 4 is a lot like Case 3, but there is gross inefficiency due to the fact that Government spending is wasteful and not matched to consumers' preferences.

Here's DB's letter.
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Mr. Trump:

Reports are that, in your telephone conversation today with Chinese President Xi Jinping, you complained that Americans’ trade deficit with the Chinese is growing.

Why are you complaining? Do you not realize that a rising U.S. trade deficit means that foreigners are increasing their investments in the United States? If you do realize this reality, why do you reckon that for us Americans it is bad? Do believe that the Joneses in Jacksonville and the Smiths in Saginaw are damaged if you increase your investments in America? If not, why do you suppose that these Americans are damaged when non-Americans increase their investments in America?

You famously strut and boast that you’re committed to “making America great again.” Yet when foreigners invest more here – investments that both likely signal increased global confidence in the U.S. economy and that add to the capital stock of the U.S. economy (thus raising the productivity of American workers) – you complain. Your actions make no sense.

If you’re really committed to enhancing America’s greatness, you should stop complaining to the heads of foreign governments about their citizens’ investments in the U.S. (that is, about their citizens’ contributions to the so-called U.S. ‘trade deficit’) and instead send flowers, chocolates, and notes gushing with thank-yous for their helping to achieve on your watch the American ‘greatness’ that you claim to want.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030