Trump’s big mistake on trade

When you buy something at a store, you hand over money and get a product in return. You end up with fewer dollars, but it doesn’t matter, because you voluntarily paid for something you wanted. The transaction works for both sides.

The same thing happens in international trade. Americans bought $506 billion worth of goods and services from China in 2017, and China bought $130 billion worth of goods and services from the United States. They got stuff they wanted. We got stuff we wanted. Buyers and sellers made transactions on terms they all agreed to.

President Trump sees it differently. He tweeted recently that the United States is “down” $500 billion in its economic relationship with China, and he insists the United States is “losing” hundreds of billions of dollars per year to China. He wants to close the gap between what China buys from us and what we buy from them by at least $100 billion per year—and he seems willing to roil financial markets with tariffs and other protectionist measures he thinks will get the job done.

But Trump’s logic is faulty. “It’s economically ignorant,” says economist Donald Boudreaux of George Mason University. “We’re not giving foreigners anything. We’re buying things from them that we think are good deals. It’s a total myth to think the trade deficit is somehow a drain on our assets or a drain on aggregate demand from the US economy.”

Trade is complicated, and Trump’s real interest seems to be protecting jobs in industries where production has shifted to China and other countries during the last several decades. The idea behind tariffs is that taxing imports will make them more expensive, making domestically produced goods more affordable by comparison. So consumers will buy more domestic stuff, in theory, which should boost the number of jobs for workers who make that stuff.

Reality is messier, as we are in the midst of learning. In response to the tariffs Trump wants to levy on Chinese imports, China has said it will impose similar tariffs on US imports to China. So products are getting more expensive in both countries, which will lead millions of consumers and thousands of businesses to change what they buy. The potential upheaval has pushed stock prices down and triggered fears of escalating protectionism. “The China-US tariffs war is alarming,” David Kotok, chairman of financial firm Cumberland Investors, wrote to clients on April 4. “Trump’s trade policy is failing and harming the United States.”

Trump seems fixated on the dollar value of America’s trade deficits with China, Mexico and other countries we do business with. But there’s nothing inherently wrong with a trade deficit, and there’s no such thing as the “right” amount of trade deficit, or surplus, because money Americans spend on foreign goods gets circulated throughout the global economy—and often ends up back in the United States. China, for instance, buys US government debt, which keeps interest rates lower than they’d be if China weren’t a purchaser and demand was weaker. Chinese consumers buy real estate in the United States and shares of US companies. Some Chinese firms invest directly in the United States, as Foxconn, for instance, will do when it builds a new factory in Wisconsin.

There are some legitimate problems in America’s trade relationship with China. There’s a convincing amount of evidence that China does cheat on trade, by subsidizing home-grown industries, for instance, which allows them to “dump” products on the global market at prices that don’t cover the cost of production. China also aggressively seeks Western trade secrets, in ways that are sometimes illicit. But there are also established ways to address these problems, such as seeking remediation at the World Trade Organization. The United States also has the right to impose tariffs on a product-by-product basis when it determines that foreign producers are engaged in unfair trade practices—as the United States has done regularly, for years.

It’s also true that global trade does hurt some workers, as production gets moved to places where it can be done more efficiently. Research by economists David Autor, David Dorn, Gordon Hanson and others has identified dozens of US communities where the shift of jobs to China has hollowed out industries, including furniture, toys, sporting goods, electronics and many others.

But free-market economies change constantly, with jobs continuously destroyed and created. Economists are generally skeptical of policies meant to protect certain types of jobs, because they depress growth and inhibit the creation of new jobs. “You freeze in place yesterday’s technologies, and you prevent tomorrow’s technologies from emerging,” says Boudreaux. “You’re protecting jobs the market is saying are now defunct.”

That doesn’t mean workers have to become obsolete once their jobs do. Policies that promote job retraining, relocation aid and stronger connections with local employers can help workers stay relevant, without the damaging effects of tariffs or other types of protectionism. But Trump has shown little interest in such wonky policies, preferring high-profile moves more likely to generate headlines—even if they’re negative.

Confidential tip line: Encrypted communication available.

Read more:

Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

Follow Yahoo Finance on Facebook, Twitter, Instagram, and LinkedIn