Trump, Sanders, and the Trade Deficit

Sanders_Cville_May11In tonight’s Republican presidential debate from Miami on CNN, the first set of questions posed to the remaining four candidates were about trade policy.

Surprisingly, Jake Tapper started with Ohio Governor John Kasich, who may not have received a first question in any of the debates so far, asking:

You’ve been a strong advocate for these trade deals over the years. Critics say these deals are great for corporate America’s bottom line, but have cost the U.S. at least 1 million jobs. How do you respond to the criticism that you’ve been catering to board rooms at the expense of the American middle class?

I say “surprisingly” because, throughout this campaign, although other candidates have talked about it when asked, insurgent presidential candidates Bernie Sanders (Democrat) and Donald Trump (Republican) have made opposition to trade agreements and freer trade cornerstones of their platforms. This is despite a near consensus among economists that freer trade benefits the overall economy as well as individual businesses, workers, and consumers.

Sanders has drawn this contrast with rival Hillary Clinton: “On the issue of trade, Secretary Clinton’s views and mine are very different,” the Vermont senator has said. “She has supported NAFTA, I opposed it. She supported permanent normal trade relations with China, I vigorously opposed [that relationship] with China.” Sanders added that he opposed freer trade relations with Vietnam, Korea, and Colombia.

For his part, Trump has said he wants to raise tariffs on Chinese goods bought by American consumers by 35 to 45 percent, denying that tariffs are taxes on American consumers (something Ted Cruz pointed out in tonight’s debate).  He has implied that the nearly quarter-century-old North American Free Trade Agreement should be nullified.

One aspect of the trade issue is the so-called trade deficit. Trump has made this topic a staple of his stump speech.  “If you look at China, and you look at Japan, and if you look at Mexico … they’re killing us,” he said during a GOP presidential debate on Fox News. “With China we’re going to lose $505 billion in terms of trade …. Mexico, $58 billion. Japan, probably about… $109 billion.”

According to conventional wisdom, a trade deficit is bad while a trade surplus is good. Frankly, however, the terms “trade deficit” and “trade surplus” are so much hot air, empty and meaningless.

National trade figures are meaningless because nations are not economic units and therefore do not trade. The numbers gathered and released by the government merely summarize countless sales and purchases made by individuals and business firms. The “nation” does not trade; only units within it do.

Canadian economist Richard Grant has explained: “The implication is that exports and trade surpluses are good is totally unfounded. They are simply numerical aggregates that emerge from the summation of millions of unrelated transactions by individuals. No one is responsible for it. To say that a surplus is ‘sound’ or that the balance of payments is ‘in good shape’ is meaningless babble.”

Grant gives this example: “When a miner sells gold, he doesn’t care who buys it so long as it gets sold. And he should be under no illusion that he is in any way serving the ‘national interest’ by selling it to foreigners instead of local buyers. If local buyers are the highest bidders, they will—and should—get the gold.”

Put another way, it doesn’t really matter whether a Charlottesville software company sells $1 million worth of its product within Virginia or if it “exports” the software to Charlotte, North Carolina, or Charlottetown in Canada. What matters is that the company earned $1 million, which can then be used to employ more workers and buy more equipment or be invested in stocks, bonds, or bank accounts.

Unfortunately, what has happened is that the term “trade deficit” has embedded itself in the national consciousness as a bad thing.

Politicians like Sanders and Trump whine that the balance of payments is sick, as do their fans. They argue that a balance-of-payments deficit indicates that American business—particularly manufacturing industry — is in decline. This is not necessarily true; in fact, the opposite may be the case.

George Mason University economist Donald Boudreaux has pointed out that trade deficits exist during “periods of slow growth, but [also during] periods of high growth. Indeed, the evidence suggests that higher trade deficits are associated with higher, rather than lower, rates of economic growth.”

Boudreaux noted in a letter to the Washington Times that, although many people believe “trade deficits mean less domestic investment,” this is not the case.  “Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus — meaning net inflows of capital into the domestic economy. More capital generally means more growth.”

In other words, contrary to Trump’s assertions, a trade deficit is beneficial to the U.S. economy, not the threat that many perceive it to be, because a substantial amount of money earned by foreign exporters is reinvested in U.S. businesses, industries, and (as Trump should know) real estate.

According to Richard Grant, “It is not exporting that makes businessmen happy, but rather selling to a wider market. How much business sells — and where — will be determined in the marketplace.” And the marketplace, we know — Adam Smith’s “invisible hand” — is a remarkable instrument for creating wealth.

Let’s remember that the next time big-government politicians propose subsidies, quotas, and tariffs to “protect” American industries (that is, to keep obsolescent factories going despite their uselessness) or simply bash Chinese or Mexican workers to please their more bigoted constituents.

The “trade deficit” is nonsense. What matters is broadening opportunities for buying and selling by Americans and their partners abroad, to create more wealth for everyone. That’s why we should challenge candidates like Bernie Sanders and Donald Trump for making unsupportable assertions that demonstrate their economic illiteracy.

@rick_sincere | facebook.com/ricksincere | Rick Sincere’s posts

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