Trump's Trade Problem Is That He Doesn't Understand It

There is one big problem at the heart of President Trump’s trade policy. He just doesn’t understand the issue. Trump doesn’t grasp why we trade, its benefits and how the world has moved ever further from his 18th-century mercantilist view of the global economy.

Instead of comprehending that trade - importing as well as exporting - is the way we benefit from the relative expertise of others, he seems to see trade as just a series of transactions entered into a ledger, with the goal of coming out in the black every time.

As he often does on trade, Trump spelled out his attitude honestly. The problem: It’s dead wrong. Last year, as he launched his futile trade war with China, he explained why he thought the United States would have no problem pursuing a protectionist policy: “When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good and easy to win.”

In an apparent reference to the U.S trading relationship with Mexico, Trump tweeted: “When we are down $100 billion with a certain country and they get cute, don’t trade anymore - we win big. It’s easy.”

With that tweet, Trump summarized his view of trade perfectly. Unfortunately, it’s perfectly wrong. Trade is not simply a matter of which country records more exports and which records more imports. Unlike football, trade is not a zero sum game. Unlike a regulation football field, global trade has many contours.

If having a trade deficit with a country is sufficient to make a trade war easy or good, Trump would not have had to back down in his trade war with Mexico. And he would have brought China to heel a long time ago.

Perhaps the biggest advantage we derive from global trade isn’t the fact that it enhances exports; rather, it is that it enhances imports. By increasing the advantages that come from specialization, it makes us better able to pursue new and more efficient means of creating wealth.

The opportunity to import forces domestic companies to compete more efficiently, to the ultimate benefit of consumers. Would U.S auto companies have introduced lean production methods if it hadn’t been for stiff competition from Asian producers? Would U.S steel consumers, such as auto companies and construction companies, be better or worse off if U.S firms such as Nucor hadn’t followed the lead of others to manufacture steel more efficiently?

Trade between countries is simple in one respect and one only: In any transaction, the buyer and the seller both obtain a benefit they believe justifies a trade. If someone buys a made-in-China scarf from Ivanka, the buyer is not simply sending money to China. They are getting a scarf from China, which they seem to think justifies the transaction. In this respect, trade is just a series of voluntary transactions.

But in this and other ways, Trump is woefully simplistic in his understanding of trade. The evidence of the value of a free market is not just abundant, it is becoming more abundant all the time - and clearer all the time as the world sees more and more evidence.

If trade deficits are so bad, why is the United States still the wealthiest country in the world? The U.S has run trade deficits for 44 years now - and has become wealthier all of the time. U.S trade deficits increased dramatically in the 1980s and 1990s - and the national economy roared. The narrowest U.S trade deficit in the past 44 years occurred in 2009 - when the country was stuck in the Great Recession. Perhaps that is because when people have less money, they buy fewer goods. Imports are actually an indicator of a country’s wealth.

This is obviously not just true of the United States. For the past few years, the majority of countries in the OECD — the rich countries’ club - have run trade deficits. On the other hand, Mozambique, Mongolia and Kazakhstan usually run trade surpluses. Which club would you rather belong to?

The truth is that trade is just part of the overall picture. Outgoing trade deficits are balanced out by incoming capital investment. The two generally net out.

Trump seems to fail to recognize that a country does not trade (at least not a country with a market economy). Companies (and their customers) do. A tariff that may appear to benefit one company will harm others. When Trump imposed import taxes on steel, for example, it may have appeared to benefit the industry (at least during the sugar-high stage.) But it badly hurt all of the industries that rely on steel as an input. Auto and construction, for example, both took multi-billion dollar hits as a direct result of the steel tariff. It is not surprising that U.S manufacturing is in recession, having recorded two consecutive quarters of negative growth.

And of course, protectionist actions invite retaliation. Ask U.S farmers, who have been hit so badly by China’s counter-actions that the federal government has had to spend $28 billion in an attempt to rescue them.

These factors have, of course, been with us for centuries. But trade deficits have actually become more irrelevant than ever, thanks to the growth and increasing importance of complex supply chains.

To be competitive today, a company has to rely on imported inputs. It has to lay off some work to other countries. Is the U.S economy worse off because Nike employs about 30,000 people making shoes in Asia - or is it better off because the efficiencies that generates keeps the company profitable, and keeps 8,000 Americans employed, generally at better wages.

Cross-border supply chains are crucial to the auto industry. Most vehicles cross either the Mexican or Canadian borders about eight times while in production. The result? U.S share of global auto trade has increased from 19 to 22 percent since NAFTA took effect. Supply chains with Mexico may cost some short-term jobs - but add enormously to long-term wealth.

Trump in effect conceded the value of supply chains when he postponed tariffs on several Apple products from China. iPads, iPhones and most of the company’s products are sourced all over the world. Conducting much of the production in China makes those products profitable - and therefore makes them available to Americans, and provides good jobs for many in the United States.

Cross-border trade is not a simple real estate transaction. Trade is in fact exceedingly complex, and becoming more so all of the time, along with everything else that is worthwhile. It is time to admit that - and throw in the ashcan the notion that the goal of trade is simply to sell more, and that trade wars are either good or easy to win.