Trumps Trade Team Failed Basic Economics

Commerce Secretary Wilbur Ross recently said

We don’t think it’s inherent in a global trading system that one country, namely the U.S., absorbs in its deficit the cumulative trade surplus of the entire rest of the world

The United States does have the largest trade deficit in the world but it also has one of the largest economies in the world.

When accounted as a percentage of GDP, the US trade deficit stands at 2.6%. Not only that, the deficit has drastically shrunk from 5.1% back in 2006.

Compared to another developed countries, the United Kingdom and Canada, the deficit is still relatively small.

Deficits Create Surpluses

Any student who at least got a ‘C’ in his ECON 101 class can tell you that a trade deficit leads to a capital surplus.

This is known as the Balance of Payments and it has been standard economic dogma for a century now.

The purposes of exports is actually to earn foreign currency so that a country can buy goods and services from abroad.

A trade surplus doesn’t actually make much sense, it just accumulates financial claims on other countries as a country with a trade surplus necessarily has a capital account deficit.

The US has a trade deficit, that is it buys more from foreigners than they buy from the US, and pays for that by selling investments. Foreigners are investing more in the US than Americans are investing abroad.

This isn’t necessarily bad, it depends on a bit on what those investments are. But the causality is actually likely to be the other way around.

Because the US has some of the deepest and most liquid capital markets and offers good investment opportunities, foreigners invest more in the US than vice versa.

That is, the net capital flows from abroad exert upward pressure on the dollar, which makes US exports of goods and services more expensive, so the US trade deficit is the result of capital inflows.

So one reason why the US has a trade deficit is simply that it’s a successful investment destination.

The Economy is not a Zero Sum Game

The more fundamental issue with Trump’s (and Bernie Sanders, Elizabeth Warren, and the rest of the Left) economic view is that he sees the marketplace where people must lose so that others can win.

Capitalism is anything but that. Centuries of innovation and rising incomes can be thanked by the mutual, co-operative economic transactions and trades (both internationally and domestically) making of the market system.

David Ricardo’s illustrated better than anyone else with his concept of comparative advantage. That is, economic actors are better off when they specialize in producing a particular product at a lower opportunity cost and trade with each other.

Income and wealth are created in the process of discovering and expanding new markets. Innovation and entrepreneurship extend the range of choices open to people. And yet not everyone is equal in their contribution to this process. There are differences among people in their abilities, motivations, and entrepreneurial talent, not to mention their life circumstances.

Those differences are the basis of comparative advantage and the gains from voluntary exchanges on private free markets. Both rich and poor gain from free markets; trade is not a zero- or negative-sum game.

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