Donald Trump, the frontrunner for the Republican nomination for president, has made political hay out of attacking free trade policies. But, asks Sean Speer, is the trade imbalance with countries like China really the best scorecard for measuring the United States’ performance on trade?
By Sean Speer, April 11, 2016
It’s hard to quarrel with success and Donald Trump has been, if anything, successful thus far in the presidential cycle. His unexpected run for the presidency has flummoxed commentators and promoted some real introspection among America’s political elites. Irrespective of the campaign’s eventual outcome, it’s likely that Trump’s unconventional candidacy will leave a lasting mark on political life. Not least because of his willingness to break with economic and political orthodoxy on a wide range of issues, including his opposition to free trade, which has been a cornerstone of his campaign.
It’s a powerful message that’s resonating with voters. It just happens to be wrong.
Trump has been using evidence of America’s negative “trade balance” to rally support around a message that free trade — including NAFTA — has resulted in other countries “beating” the United States and “taking our jobs.” It’s a powerful message that’s resonating with voters. It just happens to be wrong. Using the trade balance as a scorecard to evaluate the overall effect of free trade on the economy fails to provide an accurate picture of the benefits of global trade and commerce.
Trump frequently cites his country’s negative trade balance as evidence that free trade is a failure. He points to trade deficits with China, Mexico, and Japan as proof that American workers are being “ripped off,” “absolutely crushed,” and “killed.” It’s no surprise that such a message produces a visceral reaction from voters. Yet there are both conceptual and empirical problems with Trump’s claims.
A trade deficit or imbalance occurs when people in Country A buy more from Country B than Country B’s people buy from Country A. But this is far from an inherent problem. Trade, being a voluntary market exchange between a buyer and a seller, must be of mutual benefit to both, otherwise it wouldn’t occur. A country’s trade balance is the sum total of millions of individual, mutually beneficial transactions based on consumer preferences and needs, including iPhones, cars, and pencils. A trade deficit therefore is a better indicator of consumer spending habits than it is a reflection of economic competitiveness.
As for the implication that this trade deficit represents a loss for the American economy, basic economics teaches us that a country’s surplus cash sent abroad to buy foreign goods eventually returns (minus the value of the same country’s exports) in the form of investment. That is, after foreign sellers collect their American dollars, those dollars eventually must find their way back into the U.S. economy. So, a country’s trade deficit is thus matched by what is known as a capital account surplus. Put simply: We buy goods and services from foreigners, they then use our currency to buy, for the same value, a combination of our exports and our financial assets, such as corporate stocks and bonds, real estate, and bank deposits.
Consider the U.S. trade balance with China as an example. In 2015, Americans purchased US$482 billion worth of goods from China and the Chinese purchased only US$116 billion in goods from the U.S. That resulted in a U.S. trade deficit of US$366 billion. But that figure ignores that Chinese investors purchased more financial assets from the U.S. than American investors purchased in China. The net result is that the U.S. deficit on the current account is essentially matched by a surplus on its capital account.
Simplistic slogans, cherry-picked data, and closing the door to trade are no way to help to the U.S. economy
Creating the conditions for this type of capital investment isn’t an accident. It’s the deliberate goal of smart public policies that provide the lifeblood of dynamic economies, including entrepreneurship and job creation. Trump is wrong to characterize this as a source of concern.
This isn’t to diminish concerns about China’s non-market practices. Chinese currency manipulation, poor labour standards, and corporate espionage are legitimate problems that countries like the U.S. and Canada must confront. Meanwhile, the rigmarole that Canadian firms routinely have to go through to operate in the Chinese market is further evidence that political interference in that economy is still a serious problem.
Western economies must also ensure that we have the right policies to redeploy those workers affected by the short-term economic dislocation caused by free trade. Smart reforms may include flexible benefits for long-tenured workers, market-driven training programs, wage subsidies, and financial assistance for unemployed workers seeking to relocate for jobs.
But the key point is that simplistic slogans, cherry-picked data, and closing the door to trade are no way to help to the U.S. economy. Trump’s candidacy has left many lasting marks on America’s political scene. Hopefully his impact on U.S. trade views won’t be among them.
Sean Speer is a senior fellow at the Macdonald-Laurier Institute.