As the Dow plunges for the fourth day in a row and talk of trade tariffs rattles markets, the President continues to dig into his protectionist trade positions, arguing that trade wars can be good. For more than two years now, Trump has argued that the trade deficit is an example of how the U.S. is losing or being “ripped off’ economically.
As of December last year, the balance in trade of goods and services stands at $53.1 billion. While this isn’t as large as it was between 2004 and 2008, some academics and politicians continue attempting to draw a relationship between the trade deficit and job losses.
According to the Economic Policy Institute, the trade deficit with the 11 Trans-Pacific Partnership (TPP) economies cost 1,057,200 manufacturing jobs in 2015 alone, and as many as 3.4 million U.S. jobs between 2001 and 2015.
However, let’s look at some counter-evidence: Unemployment during the three year period since 2015 has continued to fall from 5.5 to 4.1 percent. This is thanks to the new jobs created in finance, construction and services, in great part resulting from the growing capital investment from China and other Asian economies. The $375 billion that China acquired last year through trade with the U.S. isn’t simply hoarded, but is quickly returned to the U.S. as a capital inflow, through purchasing financial assets or as foreign direct investment supporting American business growth.
In 2017, Chinese companies alone invested a record $29 billion in the U.S., up from $11.9 billion in 2014 according to a recent report published by the research firm Rhodium Group. This doesn’t sound like the U.S. is “losing” economically. As the economist Arthur Laffer made clear “The trade deficit, in point of fact, is the counterpart to the capital surplus. And capital surpluses are unambiguously good.”
Some critics also overlook the fact that countries do not engage in trade with other countries, but consumers and businesses do. And those consumers and businesses only engage in voluntary market exchanges that leave both parties better-off. As a result, it becomes clear that trade is in fact a win-win, not a win-lose as some politicians and academics would have you believe. Americans are not made worse-off as result of China becoming more productive; on the contrary, if China is more productive, they have goods and services that Americans can buy at better prices, while China has more resources to invest in the U.S.
A further point is important about the deficit. According to the U.S. Bureau of Economic Affairs, about half of all imports into the U.S. are used as inputs for U.S. manufacturing and are not purchased as consumer goods. Those “intermediate” goods provide the supplies and capital equipment that producers use. To restrict those goods or to slap higher tariffs on those goods would be to raise the costs to our own producers and cause them to be less competitive.
In an attempt to close the deficit, President Donald Trump has lurched toward the idea of slamming large tariffs on imported goods from emerging markets such as China. Instead, we should embrace the case for free trade made by 19th century political economist Henry George “blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us is to do to ourselves in time of peace what enemies seek to do to us in time of war.”
The truth about the trade deficit is that there may well be some short-term costs to some sectors of U.S. manufacturing, but the significant benefits of trade far outweigh those costs, making the American economy stronger and wealthier in the long run. On the other hand, trade barriers and tariffs proposed by misinformed politicians and special interest groups will only make us poorer as a nation.