TRUMP'S TRADE TEAM MYOPIA

President Trump’s recent  imposition of tariffs on the imports of steel and aluminum is but the latest evidence of a wrongheaded and dangerous U.S. trade policy. Wrongheaded because it is based on incorrect economic analysis. Dangerous because it will inevitably result in a trade war in which there are no winners.

The members of Trump’s trade team, and the president himself, all embrace the notion that the U.S.trade deficit, something the U.S. has registered every year since 1976, is a “bad” thing, something that should be dramatically reduced (or eliminated) if America is to be First. They also believe that the culprits for this “bad” state of affairs are unfair trade deals and unfair trade practices employed by foreign countries. Their elixir to eliminate the trade deficit is a strong dose of tariffs and other anti-trade policies imposed on foreign exports.

The key to understanding the trade deficit.

(Imports - Exports ) ≡ (Investment - Savings) + (Government Spending - Taxes)

In other words the trade deficit is equal to the excess of private sector investment over savings, plus the excess of government spending over tax revenue. So the counterpart of the trade deficit is the sum of the private sector deficit and the government deficit (federal + state and local). The U.S. trade deficit, therefore, is just the mirror image of what is happening in the U.S. domestic economy. If expenditures in the U.S. exceed the incomes produced in the U.S., which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit).

U.S. trade deficits are not caused by so-called unfair trade practices. They are made in the U.S.A.

President Trump can bully countries he identifies as unfair traders, he can impose all the restrictions on trading partners that his heart desires, but it won’t change the trade balance. It will only alter the composition of those exporting to the U.S. And by affecting this composition, the president’s interventions will hurt the U.S. consumer.

Members of the Trade Team

Free Traders

• Treasury Secretary Steven Mnuchin
• Commerce Secretary Wilbur Ross
• National Economic Council Director Larry Kudlow (has a conciliatory approach and is inclined to find consensus rather than push back aggressively against protectionist policies

Hardliners

• Trade Advisor Peter Navarro  

• U.S. Trade Representative Robert Lighthizer