National Post

IGNORE TRUMP, TRADE DEFICITS AREN’T BAD:

Trump, Asia and the persistenc­e of myth

- Joe Chidley Financial Post

Some f olks still believe the world is flat. Others are convinced the Rothschild­s and the U. S. Federal Reserve somehow sank the Titanic. The President of the United States once believed his predecesso­r wasn’t American.

Especially in this era of fake news and a plethora of channels on which to spread it, a myth can endure for ages, no matter how bad, or how firmly disproven, or how simply wrong- in- thefirst-place it is. Never underestim­ate the staying power of a crummy idea.

In the world of economics, one of those never- die ideas is that trade deficits are bad. On his trip to Asia that concluded this week, President Donald Trump took Japan, China and others in the region to task for playing the U. S. for a sucker, with unfair trade practices that have led to the States importing more stuff than it exports. To be fair, he laid at least equal blame for the demon trade deficits on his predecesso­rs, who he said were too weak to stand up to foreigners. No more, he vowed.

This Trumpian fixation goes beyond Asia, or China specifical­ly. It’s at the heart of the administra­tion’s demands at the NAFTA renegotiat­ions, where ( among other measures) it has proposed increasing the portion of U. S.- made parts used in auto manufactur­ing, which might increase American exports while at the same time disrupting complex trilateral supply chains among Canada, the U.S. and Mexico that have evolved over 25 years. Given that Trump has repeatedly threatened to walk out of NAFTA if he doesn’t get what he wants, his administra­tion’s thinking on trade deficits clearly matters to Canadians.

The trouble is, that thinking is wrong, though it’s nothing new. Adam Smith and David Hume argued convincing­ly against the “strong Jealousy with regard to the balance of trade” a quarter- millennium ago, as Daniel Griswold pointed out in a paper that further debunked the trade deficit myth nearly 30 years ago.

Nor are the misconcept­ions solely Trump’s, or solely American. Bernie Sanders demonized the U. S. trade deficit with China during his Democratic primary run. Canadian protection­ists habitually bring up our own $45-billion trade deficit with China to argue against further liberalizi­ng trade with the world’s second- largest economy.

On the surface, the badness of trade deficits sounds convincing. If we import more from Country X than they buy from us, it’s not a big leap to say that we’re paying for Country X to take jobs and economic activity away from us. And then you don’t have to go very far to conclude this must be Country X’s fault for conducting unfair trade, or our fault for putting up with it.

Trouble is, none of that is really true. Let’s take the United States- China example. Last year, the U. S. exported US$116 billion worth of stuff to China and imported US$ 463 billion, resulting in a deficit of almost US$350 billion. Factoring in services lowers the overall trade deficit by about US$ 40 billion. Yet China’s unfair trade practices — and there are some — aren’t the main reason for that. The main reason is that China makes more stuff Americans want to buy than vice versa.

America is rich, and really good at services; China is poor, and really good at making things. So it stands to reason — and is hardly cause for alarm — that rich people should take advantage of Chinese price efficiency and manufactur­ing specializa­tion by buying stuff for less.

Remember, people trade, not countries. It’s kind of like a Bay Street investment banker employing a contractor to renovate his Rosedale mansion: chances are the banker will find herself in a “trade deficit” with the contractor, who likely won’t be availing himself of her ser- vices. But that doesn’t make the banker less competitiv­e at what she does well.

But what about j obs? There’s no doubt that outsourcin­g cost jobs in manufactur­ing in recent decades. But it’s just wrong to conclude that a trade deficit is a sign that jobs are fleeing your country, or your sector.

Since the recession, the U. S. has run huge deficits in trade in goods with China. But manufactur­ing employment in the States has grown steadily since 2010. And overall unemployme­nt is at historic lows. So where’s the crisis?

Even if t here were a t rade- caused j obs crisis ( and there’s not), “fixing” i t would mean negating the benefits of importing cheaper goods. Those goods give consumers lower prices and more choice. And as Griswold pointed out 20 years ago, cheap imports let domestic businesses realize cost efficienci­es in global supply chains, which in turn ( again) keeps prices down. Just as importantl­y, imports encourage domestic producers to innovate and find efficienci­es. Raise the cost of imports with tariffs or rules of origin, and somebody will have to pay.

For instance: Canada’s supply management system in dairy. Sure, we’re protecting establishe­d farm operations, but consumers pay more. We’re not even protecting jobs in the sector, where employment is steadily falling. And we still have a trade deficit in dairy: because our protected industry can’t keep up with domestic demand, Canada imported $ 734 million more in dairy products than it exported last year.

If they were really worried about it, government­s could fight a trade deficit pretty simply — by stopping themselves from borrowing money.

( Instead, the Trump administra­tion’s tax cut proposal will instead inflate the government deficit by more than a trillion dollars, which will also inflate the trade deficit.) Yet another effective deficitfig­hting strategy would be to orchestrat­e a recession. The U.S. trade deficit shrank nicely in 2009. Of course, there were other costs.

Oh, well. Never mind that all this tough talk about trade deficits just isn’t supported by reason or by empirical evidence, or that the solutions address a problem that doesn’t exist. It’s a bad idea that has gained currency through repetition and stubbornne­ss.

Don’t expect it to go away anytime soon.

ON THE SURFACE, THE BADNESS OF TRADE DEFICITS SOUNDS CONVINCING.

 ?? ANDREW HARNIK / THE ASSOCIATED PRESS ?? On his trip to Asia that concluded this week, President Donald Trump took Japan, China and others in the region to task for playing the U. S. for a sucker.
ANDREW HARNIK / THE ASSOCIATED PRESS On his trip to Asia that concluded this week, President Donald Trump took Japan, China and others in the region to task for playing the U. S. for a sucker.
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