I have suggested before that Donald Trump does not actually hold many firm beliefs, at least in the sense we normally talk about a politician’s ideology or political philosophy. One exception to that, as near as I can tell, concerns trade. If Trump does hold something approximating an ideological belief, it’s that our trade deals with other countries have made us poorer as a country.
He’s wrong about that for a number of reasons. For example, the evidence shows U.S. manufacturing jobs have mostly declined because of technology and automation, not trade or off-shoring. But one crucial element of understanding international trade is knowing that a national trade deficit does not actually represent a reduction in the amount of money that nation has. Having a trade deficit doesn’t mean money is leaving the country. The money comes back — it has to, unless people in other countries are going to keep it under their mattresses or in other places where they can’t spend it — but it comes in the form of investment rather than consumption. That creates jobs here, just in a different way.
I have read various explanations of this seemingly esoteric economic principle before, but I have never read a clearer explanation than this one by Kevin Williamson published at National Review this morning:
“Trade deficits are partly a question of consumer preference — American consumers really do like Hondas more than Japanese consumers like Buicks — but they are not mainly a question of consumer preference. They are mainly a question of investor preference — and investors prefer the United States, which is why there is almost twice as much foreign direct investment in the United States as in China, even though China’s economy has grown at a much faster rate over the past 20 years.
“It works like this: Almost every advanced country does a great deal of international trade. They have lots of imports and exports because it is easier to grow sugar in Florida than it is in Norway and more efficient to sew T-shirts in Bangladesh than it is in Switzerland. When Walmart orders $1 million worth of flip-flops from a Chinese concern, those Chinese gentlemen receive 1 million delicious U.S. dollars, which they are very happy and grateful to have. But what can you do with U.S. dollars? You can buy stuff from U.S. companies or you can buy assets from sellers who take U.S. dollars, which ultimately means U.S.-based investments. (This is true even when you add in all of the real-world complications such as foreign exchange.) If you are that flip-flop entrepreneur in China, you probably have a very high rate of savings, which is normal for people in poor, backward, and unstable countries. There is lots of uncertainty in a place like China, and having a whole lot of savings — especially dollar-denominated assets — is a rational response to that. …
“Trade deficits don’t happen because the wily Japanese juke us on trade policy. They happen because intelligent people holding a fistful of dollars very often decide to forgo the consumption of American consumer goods in order to invest in American assets. In economics terms, what this means is that the trade deficit is a mirror image of the capital surplus. A capital surplus isn’t necessarily an unalloyed good (everything in economics is about tradeoffs), but it is a pretty nice thing to have around if you are, say, an entrepreneur looking to build a new facility in Houston or Jacksonville and looking for some investors to stake you.” (emphasis original throughout)
So, what would the opposite of that look like? Judging by what we hear from Trump, it would include a significant — perhaps 35 percent — tariff on goods coming into our borders. That means: a) higher prices for our consumers; and b) less money for the sellers of those goods to invest back in the U.S.
Could it also mean some more jobs here, as some manufacturing might be shifted stateside? Yes (although it’s also quite possible the newly shifted production would be carried out by robots rather than humans). But any jobs gained in that way would be offset at least in part by jobs lost due to that reduced investment. It might be a net gain, or it might be a net loss. And this is not even to delve into how a less efficient use of resources — trying to do things here at a higher cost rather than buying them from elsewhere at a lower cost — would ultimately crimp the economy and thus job growth. Or into the possibility that a wider trade war would result, costing American jobs as other countries retaliate with tariffs on the products we make. Despite all the hand-wringing about Trump’s tweets and phone calls from Taipei, this is where he has the most realistic chance to harm Americans and our relations and interests abroad.
You might think Trump, as someone who has operated businesses and invested overseas, would understand all this. We’ll all be better off if he does, and this is just one more belief he only appears to hold.