While Trump ramps up tariffs on China, remember that trade deficits do not signify weakness

 
Max von Thun
President Trump Attends Congressional Medal Of Honor Society Reception
Listen to Trump on trade, and it’s easy to get the impression that there’s nothing worse than a trade deficit (Source: Getty)

The trade war we all feared is beginning. Last Thursday, President Donald Trump confirmed that he would be imposing $60bn of tariffs on Chinese products, causing global markets to tumble.

Trump’s justification for this move has been America’s trade deficit with China – he explicitly said on Thursday that he had asked China to cut this deficit “immediately”.

This is a recurring theme from the President. Listen to Trump on trade, and it’s easy to get the impression that there’s nothing worse than a trade deficit. Time and time again he has railed against them, depicting trade surpluses and deficits as a simple matter of winning and losing, and decrying the impact on American jobs and businesses.

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Earlier this month, Trump tweeted: “The United States has an $800 Billion Dollar Yearly Trade Deficit because of our ‘very stupid’ trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years.”

Setting aside the fact that once services are taken into account, the US trade deficit was actually $566bn in 2017, there is a more fundamental flaw in Trump’s reasoning. Because, as most economists will tell you, whether a country imports or exports more is a poor measure of its prosperity.

Trade is not a zero-sum game, and deficits are not proof that a country is “losing”. People benefit hugely from being able to buy foreign goods that are often cheaper and better quality than those available domestically. If we believe in competition and consumer choice, why should these not apply to goods that come from beyond our borders?

If a country’s preference for foreign goods does result in a trade deficit, this is fully compatible with a thriving economy.

In fact, deficits tend to be larger when economic growth is at its strongest, as pay packets expand and people increase spending on imports.

Recessions have the opposite effect, which is why America’s trade deficit plummeted – from around six per cent of GDP to 2.5 per cent – during the last financial crisis.

Since 1948, the UK has only recorded a trade surplus 18 times, yet its economy performed well in many more of those years.

What might sound like a matter of technical economic theory is in fact anything but. As you read this, Trump is leading the US into a disastrous global trade war, in large part because of his misunderstanding of deficits and the means with which to address them.

Across the world, economic nationalists with similar views are gaining ground, often on the backs of voters unable to pick apart their spurious claims on trade.

In the UK, the self-styled “Economists for Brexit” have argued that leaving the EU will benefit Britain by shrinking its trade deficit, while other Brexiteers have made the even sillier argument that our trade deficit with the EU will force it to give us a good deal.

Of course, it is true that trade can cause economic dislocation in certain sectors and communities, as domestic firms struggle to compete with cheap imports and workers and even industries are made redundant.

However, deficits are not a good way of measuring these impacts – and crude measures like tariffs certainly won’t reverse them.

If liberal politicians want to defend our hard-fought trading system, they should first ensure that their citizens have the skills and public support to prosper from free trade and withstand occasional displacement.

But above all, they need to explain – in straightforward terms – why trade makes us better off, and why deficits don’t mean a country is losing.

Failure to do so would mean letting the nationalists win the debate, at best making us all poorer, and at worst triggering a collapse of the global order not seen since the 1930s.

Read more: China's trade surplus with US hits record $31bn high

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