Trump Administration Flunks Trade Economics 101

International trade is one of the many areas in which the Trump administration has been egregiously bad. Trump himself seems to lack even the most basic knowledge about the principle of trade — he seems to think it is always zero-sum with a loser for every winner — and he’s surrounded himself with advisers who are just as ignorant.

We are indebted to George Mason University economist Donald Boudreaux for keeping a close eye on these reckless ignoramuses, who are so casual about our well-being. In the latest of a series of blog posts, Boudreaux again notes how militantly ignorant those advisers are. The latest post again demolishes trade adviser Peter Navarro, who’s never seen an American tariff he did not love. Boudreaux points that Navarro doesn’t even understand what a trade deficit is. On the one hand, Navarro praises Trump’s tariffs for combating the trade deficit while on the other he praises them for stimulating foreign investment in America. What’s wrong with that? Here’s Boudreaux:

Mr. Navarro apparently doesn’t understand the elementary fact that, because every dollar invested in the U.S. by foreigners is a dollar not spent on U.S. exports, the investments about which Mr. Navarro today boasts promote the very trade deficits that, in other contexts, he bemoans. [Emphasis added.]

When people complain about the trade deficit, they are referring to an imbalance in the merchandise account: they mean that the dollar amount of goods that Americans sell to people in a given country or all countries is less than the dollar amount of goods that Americans buy.

But merchandise is only about half the picture. A capital account also exists; that’s a comparison of the dollar value of foreign investment in America with the dollar value of American investment in other countries. When a foreigner earns a dollar from an export to America, he has a few options of what to do with that dollar, which he can’t spend at home. If he buys an American product, he leaves the merchandise account unchanged (a dollar out and a dollar in), but if he invests the dollar in America, he indeed contributes to a deficit in the merchandise account while also contributing to a surplus in the capital account. The accounts are roughly mirror images. But people ignore the capital account, and that’s just ignorant if not stupid.

So it is ridiculous to praise trade restrictions for remedying the merchandise-account deficit and for attracting foreign investment to America (which increases that deficit). If Navarro really understood or cared about the trade deficit (one need not care about it actually), he would condemn foreign investment and demand that foreigners buy American products. I’d like to see him try that.

Trump and his trade advisers would certainly flunk any course in elementary economics.

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